L~J S 




Commercial 
Banking Practice 

under the 

Federal Reserve Act 



THE Law and Regulations, the 
Informal Rulings of the Federal 
Reserve Board, and the Opinions of 
Counsel governing Bank Acceptances, 
Rediscounts, Advances, and Open 
Market Transactions of the Federal 
Reserve Banks. 



Revised to 
October, 1918 



Service Department 

National Bank of Commerce 
in New York 






AUTHORITIES 



This book has been compiled from the following 
official sources: 

Federal Reserve Act 

National Bank Act 

War Finance Corporation Act 

Regulations of the Federal Reserve Board 

Federal Reserve Bulletin 



•; «f d. 

AUG 20 |9|g 



First Edith*. July, J 9 1 7 
Revised EJitioi October, 1918 



Foreword 

Commercial banking has been made more 
efficient through the use of acceptances. The 
National Bank of Commerce in New York has 
been a pioneer in recommending a broader use 
of acceptances, and this Bank is today handling 
a large and increasing volume of acceptance 
business. 

We are engaged in a commercial banking busi- 
ness, and, therefore, our interest in commercial 
banking practice is fundamental. This volume 
has been compiled to meet the needs of practical 
business men and bankers — the customers and 
friends of the National Bank of Commerce in 
New York. 

The present edition is a complete revision up 
to October 1918 of our first edition issued in 
July 1917. We have attempted not only to revise 
but to improve the first book. 

This Bank is prepared to answer questions in 
regard to commercial banking practice with par- 
ticular reference to the use of acceptances. We 
are constantly in touch with new developments 
in the laws and rulings affecting commercial 
banking, and we have complete information re- 
garding the acceptance market. 

James S. Alexander, 

President 



TRADE ACCEPTANCE 



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CONTENTS 

Part I* Bank Acceptances Page 

Acceptances 9 

General Statutory Provisions 11 

Acceptance Policy of the Federal Reserve Board 13 

Bank Acceptances Based on Imports and Exports 16 

Bank Acceptances Executed to Furnish Dollar Exchange ... 29 
Bank Acceptances Based on Domestic Shipments of Goods 33 

Bank Acceptances Secured by Warehouse Receipts 38 

Investment in Acceptances by Member Banks 43 

Part II. Rediscounts with Federal Reserve Banks 

General Statutory Provisions .49 

General Regulations of Federal Reserve Board 53 

Rediscount of Promissory Notes , . . 56 

Rediscount of Drafts and Trade Acceptances 76 

Rediscount of Six Months' Agricultural Paper 90 

Rediscount of Commodity Paper 96 

Rediscount of Bank Acceptances 99 

Part III. Advances by Federal Reserve Banks 

General Statutory Provisions 109 

Security 109 

Maturity Ill 

Part IV. Open Market Transactions 

General Statutory Provisions 115 

General Regulations and Rulings 115 

Transactions in Bank Acceptances 118 

Transactions in Bills of Exchange and Trade Acceptances . 123 
Index 128 



PART I. 



Bank 
Acceptances 



PART I. 

Bank Acceptances 

The term "acceptance" designates a draft or bill "Acceptance" 
of exchange drawn to order, payable at a definite defined - 
time after date or sight, the obligation to pay which 
has been accepted by an acknowledgment thereon 
written or stamped and signed (generally across the 
face of the instrument) by the party on whom the 
bill is drawn. This acknowledgment, which gen- 
erally consists merely of the word - 'accepted" fol- 
lowed by signature and date, constitutes the agree- 
ment of the acceptor to pay the draft at maturity 
according to its tenor, without qualifying condi- 
tions. To be negotiable, such an accepted bill must 
be for a. definite amount and must be payable in 
money. 

An ordinary "trade acceptance" is created when, Bank acceptance, 
for example, the seller of merchandise draws a 
draft for the purchase price on the purchaser and 
the purchaser accepts the draft. The purchaser, 
however, may enter into an agreement with his 
bank whereby the bill is drawn on the bank and is 
accepted by it for his account instead of by the pur- 
chaser himself. Such a draft, when accepted, be- 
comes a "bank acceptance." The Federal Reserve 
Board has defined a bank acceptance as "a draft or Definition, 
bill of exchange of which the acceptor is a bank or 
trust company, or a firm, person, company, or cor- 
poration engaged in the business of granting bank- 
ers' acceptance credits." 

Bank acceptances are used largely in financing u$e of bank 
international trade and domestic transactions in- acce P tance »- 
volving major staple commodities. They hold a 



Coverture of 
acceptances. 



10 CommercialBankingPractice 

preeminent place among credit instruments and 
offer a means of investment in which the credit risk 
has practically been eliminated. This is due to the 
fact that direct responsibility for their payment 
rests on banking institutions whose credit is gen- 
erally and widely known. 

At a meeting of the leading banks and bankers 
of New York, Boston, Philadelphia, and other 
cities, held at the National Bank of Commerce in 
New York, August 14, 1918, it was resolved that: 
"The accepting bank shall require from its clients 
that it be placed in funds to meet acceptances on 
day of maturity either by 

"(a) The deposit of clearing house funds one 

day prior to maturity, or 
"(b) The deposit of cash or check on the Federal 
Reserve Bank of New York on the day of 
maturity, or 
" (c) Debit to the account of the bank's client on 
day of maturity against funds cleared on, 
or prior to, such date." 



11 



General Statutory Provisions 

Section 13 of the Federal Reserve Act, as 
amended, provides as follows with regard to the 
power of national banks as members of the Federal 
Reserve System to accept drafts or bills of ex- 
change : 

"Any member bank may accept drafts or bills of Acceptance of 
exchange drawn upon it having not more than six draft *- 
months' sight to run, exclusive of days of grace, 

"I. Which grow out of transactions involving Against imports 
the importation or exportation of goods ; or an exporU - 

"II. Which grow out of transactions involving Against domestic 
the domestic shipment of goods provided shipping shipment8 - 
documents conveying or securing title are attached 
at the time of acceptance ; or 

"III. Which are secured at the time of accept- Against goods in 
ance by a warehouse receipt or other such document warehouse - 
conveying or securing title covering readily market- 
able staples. 

"No member bank shall accept, whether in a for- Limit on acceptances 
eign or domestic transaction, for any one person, for one interest, 
company, firm, or corporation to an amount equal 
at any time in the aggregate to more than ten per 
centum of its paid-up and unimpaired capital stock 
and surplus, unless the bank is secured either by 
attached documents or by some other actual se- 
curity growing out of the same transaction as the 
acceptance ; and 

"No bank shall accept such bills to an amount Limit on aggregate 
equal at any time in the aggregate to more than acceptances, 
one-half of its paid-up and unimpaired capital 
stock and surplus: 

"Provided, however, that the Federal Reserve Extension of limit 
Board, under such general regulations as it may 



12 



Commercial Banking Practice 



Limit on aggregate 
domestic acceptances. 



Acceptances for 
dollar exchange. 



Acceptances for one 
bank limited. 



Limit on aggregate 
of such acceptances. 



prescribe, which shall apply to all banks alike re- 
gardless of the amount of capital stock and surplus, 
may authorize any member bank to accept such bills 
to an amount not exceeding at any time in the 
aggregate one hundred per centum of its paid-up 
and unimpaired capital stock and surplus : 

"Provided, further, that the aggregate of accept- 
ances growing out of domestic transactions shall in 
no event exceed fifty per centum of such capital 
stock and surplus. 

"IV. Any member bank may accept drafts or 
bills of exchange drawn upon it having not more 
than three months' sight to run, exclusive of days 
of grace, drawn under regulations to be prescribed 
by the Federal Reserve Board by banks or bankers 
in foreign countries or dependencies or insular pos- 
sessions of the United States for the purpose of fur- 
nishing dollar exchange as required by the usages 
of trade in the respective countries, dependencies, 
or insular possessions. 

"Provided, however, that no member bank shall 
accept such drafts dr bills of exchange referred to 
in this paragraph for any one bank to an amount 
exceeding in the aggregate ten per centum of the 
paid-up and unimpaired capital and surplus of the 
accepting bank unless the draft or bill of ex- 
change is accompanied by documents conveying or 
securing title or by some other adequate security : 

"Provided, further, that no member bank shall 
accept such drafts or bills in an amount exceeding 
at any time the aggregate of one-half of its paid-up 
and unimpaired capital and surplus." 

(Federal Reserve Act, Section IS.) 



13 



Acceptance Policy of the Federal 
Reserve Board 

GENERAL STATEMENT 



The Federal Reserve Board desires to avoid the 
adoption of rigid regulations covering acceptances. 
The development of an efficient acceptance system 
will be facilitated if the banks of the United States 
assimilate and voluntarily adopt the underlying 
principles hy which the Board must be guided, with- 
out requiring inflexible rules. 

Conservation of the strength of the Federal Re- ^S^SlShTR.* 1 
serve System requires : serve System. 

(a) That it be possessed of short paper well 
scattered in its maturities (not exceeding ninety 
days) ; 

(b) That when this paper matures it can be act- 
ually collected ; 

(c) That the supply of new paper coming into 
the market can be controlled to a certain degree by 
an advance or decline in the rate of interest at which 
bankers' acceptances are bought. 

Agreements to grant credits for an extended Character of 
period by the purchase of 90-day paper or by 90- acceptance 
day acceptances ought to be based upon transac- 
tions connected directly with the purchase and sale 
of goods and the intermediate process of manufac- 
turing. Credits so extended should relate to the 
[liquid] resources of the borrowing concern and 
should not be granted for the purpose of furnishing 
working capital or for the temporary financing of 
permanent investments. 



14. 



Commercial Banking Practice 



These transactions should be of an individual 
character. They call for direct contact between 
banker and borrower, and syndicate credits should 
be avoided. Agreements by bankers to furnish one 
or two year money at a definite rate of interest 
against 90-day paper or acceptances to be used to 
finance themselves should not be countenanced, 
either openly or in the form of exchange of paper 
between bankers. 

(Memorandum issued by Federal Reserve Board, Pages 
257, 260, April, 1918, Bulletin; printed in full at Pages 257- 
260.) 



SYNDICATE ACCEPTANCE CREDITS 



Policy of Federal 
Reserve Board. 



Authorization. 



Duration of 
credits. 



Rate. 



Character. 



The Federal Reserve Board has issued a mem- 
orandum stating its policy in dealing with accept- 
ances drawn under credits extending over a period 
of one or two years. 

In this memorandum the Board authorized the 
banks of New York, during a period which may be 
declared ended at any time, to proceed upon certain 
principles which may be summed up as follows : 

(1) Acceptance credits opened for periods in 
excess of 90 days should only, in exceptional cases, 
extend over a period of more than one year, and 
in no case for a time exceeding two years. 

(2) Banks which are members of groups open- 
ing these credits should not buy their own accept- 
ances, and where an agreement is made with the 
drawer for purchase of acceptances for future de- 
livery, the rate should not be a fixed one, but should 
be based upon the rate ruling at the time of the sale. 

(3) Transactions covered by these credits 
should be of a legitimate commercial nature, and 
acceptances must be eligible according to the rules 
and regulations of the Board. 



Bank Acceptances 



15 



Quality and 

quantity toe 
controlling 



(4) Whenever syndicates are formed for the 
purpose of granting acceptance credits for more 
than moderate amounts, Federal reserve banks 
should be consulted with regard to the transaction. 
The question of eligibility, both from the stand- 
point of the character of the bill and of the amount 
involved, will be passed upon by the Federal re- 
serve bank subject to the approval in each case of 
the Federal Reserve Board. 

It must be understood in passing upon these 
transactions that not only quality but also quantity 
must be the controlling factors. The aggregate of factors, 
these acceptances should not be permitted to con- 
stitute the greater proportion of outstanding ac- 
ceptances at any time, and it must be understood 
that while the Federal reserve banks and the Fed- 
eral Reserve Board might look with favor upon a 
transaction as long as the total amount involved is 
not excessive, transactions of exactly the same 
character may be ruled out whenever the aggregate 
amount of outstanding acceptances of this char- 
acter becomes, in the opinion of the Federal Re- 
serve Board, unduly large. 

(Announcement of Federal Reserve Board, Page 257, April, 
1918, Bulletin.) 



Approval of 
Federal Reserve 
Board. 



16 



Bank Acceptances Based on 
Imports and Exports 



CHARACTER 



Statutory Provisions 



Acceptances 
in foreign 
trade. 



"Any member bank may accept drafts or bills of 
exchange . . . which grow out of transactions 
involving the importation or exportation of goods." 

(Federal Reserve Act, Section 13.) 



Opinions and Rulings 



Identification 
of specific 
goods not 
required. 



Determination of Character of Transactions on Which 
Acceptances Are Based. 

Held not to be necessary that the specific goods 
covered by an acceptance based upon an import or 
export transaction must be identified at the time of 
the acceptance. 

(Informal Ruling, Page 405, December, 1915, Bulletin.) 



Good faith 
a test. 



Good faith must be relied upon to a large extent 
in determining whether an acceptance is based upon 
a transaction involving the importation or exporta- 
tion of goods. A member bank would be justified 
in putting on the legend "this acceptance is based 
on a transaction involving the importation or ex- 
portation of goods," provided it is satisfied the state- 
ment by its customer is made in good faith. 

(Informal Ruling, Page 406, December, 1915, Bulletin.) 



Bank Acceptances 17 



Member banks may best protect themselves in Proof of 
determining whether acceptances are based upon 
the exportation or importation of goods by stipu- 
lating the right at times to ask for substantiation of 
assurances from a customer. 

(Informal Ruling, Page 406, December, 1915, Bulletin.) 

Transaction Mast Itself Involve Import or Export 
of Goods. 

A transaction, in order to be the basis of a draft Transactions 
or bill eligible for acceptance by a member bank, imp^iTorexport 
must itself involve the importation or exportation not ««ffi«ent basis, 
of goods. A transaction wholly independent of the 
transaction covering the importation or exportation 
of goods is not sufficient basis for an acceptance, un- 
der the terms of section 13 (relating to acceptances 
against imports or exports). 

(Opinion of Counsel, Page 276, September, 1915, Bulletin.) 

Where the contract between a seller of goods who J , 1 ra jJ*^ e | l * ed 
draws a draft and the purchaser is entirely inde- domestic 
pendent of the contract for the export of the goods, transactions - 
the draft would have to be treated as drawn in a 
domestic transaction and would have to be accom- 
panied by shipping documents or secured by ware- 
house receipts or other similar documents convey- 
ing and securing title when accepted by the drawee 
bank. 

(Informal Ruling, Page 4>35, May, 1918, Bulletin.) 

A dealer having drawn drafts accepted by a °P tion *° 
member bank in an export transaction should be ^"domestic 
given the option, with the consent of the accepting transactions, 
bank, to secure such drafts in the manner required 
of those drawn in domestic transactions if he wishes 
to use the proceeds derived from the sale of the 
goods exported for purposes other than the pay- 
ment of such acceptances. 

(Opinion of Counsel, Page 439, May, 1918, Bulletin.) 



18 



Commercial Banking Practice 



Acceptance at 
instance of 
exporter. 



Intention to 
export ultimately 
not sufficient basis. 



Sale to Allied 
Purchasing Com- 
mission involves 
export 



If a drawee bank accepts at the instance of the 
purchaser of goods, the purchaser having a contract 
to export such goods, the drafts would grow out of 
a transaction involving the export of goods and 
could be accepted by the drawee bank under author- 
ity of section 13. 

(Informal Ruling, Page 435, May, 1918, Bulletin.) 

Where a domestic corporation "A" enters into a 
contract with another domestic corporation "B" to 
furnish material to be used by "B" in the manufac- 
ture of products which "B" is under contract to ex- 
port, the mere fact that the material furnished is 
ultimately intended for export in some form can 
not be said to merge the two transactions into one. 
The transaction between "A" and "B" could not be 
said to involve the exportation of goods. 

(Opinion of Counsel, Page 276, September, 1915, Bulletin.) 

A member bank may accept drafts drawn for 
the purpose of financing the sale of goods to one 
of the allied purchasing commissions, such goods 
to be delivered aboard ship and paid for within a 
reasonable time thereafter. 

It is held that the sale of goods in the manner 
indicated comes within the terms of section 13, au- 
thorizing a member bank to accept drafts "growing 
out of transactions involving the importation or ex- 
portation of goods," even though title to the goods 
be transferred to the foreign purchaser before the 
shipment out of the United States actually begins. 
The transaction against which the draft is drawn 
involves the direct sale to a foreign purchaser, and 
the fact that the sale itself may be consummated be- 
fore the exportation of the goods actually com- 
mences is immaterial, provided that the transaction 
is bona fide, and that the accepting bank has no 
reason to believe that the purchaser will divert the 
goods from their foreign destination. 

(Informal Ruling, Page 878, November, 1917, Bulletin.) 



Bank Acceptances 19 

i 

Acceptance of Drafts Prior to Purchase or Sale of Goods 
Imported or Exported. 

In interpreting the word "involved" in connec- Good » purchased 
tion with the importation or exportation of goods, Acceptance. ° 
upon which an acceptance has been based, it is held 
that goods may be purchased and shippepl subse- 
quent to the time of the first acceptance, provided 
that there is a definite bona fide contract for the 
shipment of the goods within a specified and reason- 
able time. 

(Informal Ruling, Page 405, December, 1915, Bulletin.) 

Section 13 of Federal Reserve Act construed to Delay in 
justify a national bank in accepting a draft drawn hJ^ateriai! 
upon it in settlement of advances for cotton being 
accumulated by cotton buyers for export. The fact 
that there is a temporary delay in actual shipment 
of goods is immaterial. 

(Informal Ruling, Page 458, September, 1916, Bulletin.) 

A national bank may properly accept a draft, Acceptances 
drawn for the purpose of importing goods whether importations 
or not the sale of the goods under consideration has of * ood$ - 
actually been consummated at the time of the ac- 
ceptance of the draft, if the accepting bank is as- 
sured that the proceeds of the draft will ultimately 
be used solely for the purpose of financing a trans- 
action involving the importation of goods. It is not 
necessary that the goods to be sold be identified at 
the time of acceptance. The accepting bank, how- 
ever, must be reasonably sure that the draft is 
drawn for the purpose of financing a transaction in- 
volving the importation or exportation of goods, 
and that its proceeds will be used for that purpose. 

(Informal Ruling, Page 527, July, 1917, Bulletin.) 

A member bank would be justified, if fully se- ^ t P £j, t M fJ2f rael 
cured, in accepting drafts drawn by a local cotton- 
buying firm having a contract to sell to foreign buy- 
ers if the transaction, after having been made in 



20 



Commercial Banking Practice 



Drafts drawn 
against collateral 
of acceptances. 



Ineligible for 
acceptance. 



good faith, ultimately resulted in the sale of the 
cotton to an American instead of a foreign pur- 
chaser. It was assumed in connection with this in- 
terpretation of section 13 that the bank had received 
permission from the Board to accept drafts or bills 
of exchange drawn upon it; that the cotton buyers 
had a contract to sell cotton to a firm of Liverpool ; 
that they held the cotton subject to shipping re- 
ceipt of the Liverpool firm; and that because of 
freight rates and shipping conditions the Liverpool 
firm changed its policy and directed the sale of the 
cotton. 

(Informal Ruling, Page 13, January, 1916, Bulletin.) 

An acceptance house which has purchased an ac- 
ceptance based on the importation or exportation of 
goods desires to reimburse itself by drawing a bill 
upon a national bank, pledging as collateral secur- 
ity for the bill the original acceptance. It is held 
that the new bill cannot properly be said to grow 
out of the original export transaction in the sense 
contemplated by the Federal Reserve Act. 

A national bank is not authorized to accept a 
draft drawn under the above circumstances because 
it is not an acceptance growing out of a transaction 
involving the importation or exportation of 
goods, nor drawn by a bank or banker located in a 
foreign country, nor does it grow out of a transac- 
tion involving the domestic shipment or storage of 
goods. 

(Informal Ruling, Page 29, January, 1917, Bulletin.) 



When acceptance 
agreements 
should show 
basis of drafts. 



Acceptance Agreements of Dealers in Same Goods ior 
Export and Domestic Sale. 

Where a dealer who is engaged in the purchase of 
the same character and class of goods for export 
and for domestic use desires to finance the purchase 
and sale of goods to be exported, his agreement with 
a member bank accepting such drafts should show: 



Bank Acceptances 21 

(a) that he has a contract for the export of the 
goods ; 

(b) that the total amount of drafts under such 
credit will not exceed the aggregate amount in- 
volved in the export transaction ; 

(c) that the proceeds of the drafts are to be 
used in connection with the export transaction ; and 

(d) that the proceeds of the sale of goods ex- Or drafts should 
ported will be applied in payment of the accept- e ,ecure ' 
ances unless the dealer has in the meantime placed 

the bank in funds to meet them at maturity, or has 
secured such acceptances in the manner required of 
domestic acceptances. 

(Opinion of Counsel, Page 438, May, 1918, Bulletin.) 
Acceptances against Goin and Bullion. 

Gold coin is "goods" within the meaning of sec- G° ld «>»• 
tion 13 of the Federal Reserve Act. 

(Informal Ruling, Page 29, January, 1917, Bulletin.) 

Gold bars may be properly considered as goods. Bullion. 

(Informal Ruling, Page 29, January, 1917, Bulletin.) 

MATURITY 

Statutory Provisions 

Acceptances of member banks against imports Maturity, 
and exports are limited to drafts "having not more 
than six months' sight to run, exclusive of days of 
grace." 

(Federal Reserve Act, Section 13.) 

Opinions and Rulings 

Duration of Acceptance Credits. 

A national bank is held to be authorized to enter Duration 
into an agreement having more than six months to " c n c t ^ ing six 
run, by the terms of which it obligates itself for a 
period of time specified in the agreement to accept 



22 



Commercial Banking Practice 



Syndicate 

acceptance 

credits. 



drafts drawn upon it, provided such drafts grow out 
of transactions involving the importation or expor- 
tation of goods, and that the individual drafts have 
not more than six months' sight to run. This dis- 
tinction is emphasized: "While a letter of credit or 
credit agreement may lawfully be made by a na- 
tional bank which will extend by its terms for a 
period exceeding six months, the agreement must 
not be of such a character as will impose upon the 
holders of drafts accepted thereunder any obliga- 
tion to renew such drafts so that the period of ac- 
ceptance shall exceed six months in duration as to 
any specified draft." 

(Informal Ruling, Page 269, September, 1915, Bulletin.) 

For statement of policy of Federal Reserve 
Board with regard to syndicate acceptance credits 
having a duration of several years, see "Syndicate 
Acceptance Credits,"pages 14-15, above. 



Renewals for 
reasonable periods. 



Renewals against 
imports on docks. 



Renewal of Bank Acceptances. 

Upon payment of an acceptance the accepting 
bank may for a reasonable period accept new 
drafts for the financing of the original transaction, 
even after the shipment and delivery of the goods, 
provided such renewals be stipulated in the orig- 
inal contract as an incidental condition of the trans- 
action of importation or exportation upon which the 
acceptance is based. 

(Informal Ruling, Page 405, December, 1915, Bulletin.) 

The acceptance of a private banking house made 
for a bag company, stating in the body of the draft 
that it is for burlap from Calcutta stored on the 
docks, might be continued or renewed while the 
goods are on the dock. 

(Informal Ruling, Page 30, January, 1917, Bulletin.) 



Bank Acceptances 28 

AMOUNT BANK MAY ACCEPT FOR 
ONE INTEREST 

Statutory Provisions 

"No member bank shall accept, whether in a for- Ten per 
eign or domestic transaction, for any one person, cent Iimlt - 
company, firm, or corporation to an amount equal 
at any time in the aggregate to more than ten per 
centum of its paid-up and unimpaired capital stock 
and surplus, unless the bank is secured either bv r 

. f. ' . , . * Exception. 

attached documents or by some other actual security 
growing out of the same transaction as the accept- 
ance." 

(Federal Reserve Act, Section 13.) 

Opinions and Rulings 

Drafts accepted by foreign correspondents at the Acceptances 
request and under the guarantee of a national bank ^/re"^^ 
in the United States should be reported as a direct under guarantee 
liability of such national bank, and treated as sub- of national bank - 
ject to the limitations imposed by the Federal Re- 
serve Act on the acceptance power of national 
banks. 

(Opinion of Counsel, Page 311, April, 1918, Bulletin.) 
Exemption from Ten Per Cent Limit. 

The ten per cent limit upon the amount of ac- Secured 
ceptances which any member bank might make for bllls * 
any one person, company, firm, or corporation does 
not apply if "the bank is secured either by attached 
documents or by some other actual security grow- 
ing out of the same transaction as the acceptance. 
• • • 

If documents which were attached at the time of Accepting 
the acceptance are surrendered and no other se- bank . mu,t 

*•. . remain secured. 

curity growing out of the same transaction is sub- 
stituted, the ten per cent limit will apply. The ac- 



24 



Commercial Banking Practice 



cepting bank must remain secured in the manner 
prescribed during the life of the acceptance in order 
to be exempt from the ten per cent limit. 

(Informal Ruling, Page 286, April, 1917, Bulletin.) 



What constitutes 
actual security 
growing out of 
same transaction. 



The only doubtful question is as to what consti- 
tutes "some other actual security growing out of 
the same transaction as the acceptance." The ten 
per cent limit does not apply where the acceptor 
holds: 

1. Shipping documents. 

2. Warehouse receipts. 

3. Trust receipts which do not enable the bor- 
rower to obtain the goods for his own use. 

The ten per cent limit does apply where the bank 
holds merely the ordinary trust receipt which gives 
it only a lien on the goods in the hands of the pur- 
chaser or on their proceeds. 

(Informal Ruling, Page 286, April, 1917, Bulletin.) 



Trust receipts 
as actual security. 



If an acceptance is secured by shipping docu- 
ments which are surrendered by the acceptor for a 
trust receipt which permits the purchaser of the 
goods to retain control of the goods, the accepting 
bank cannot be said to be secured "by some other 
actual security" as provided in section 13 of the 
Federal Reserve Act. A trust receipt, however, 
which does not permit the purchaser to procure con- 
trol of the goods, may properly be said to be actual 
security within the meaning of the Act. 

(Opinion of Counsel, Page 881, November, 1917, Bulletin.) 



When section 
5200 applies. 



Relation of United States Revised 
5200, to the Ten Per Cent Limit. 



Statutes, Section 



A member bank may legally purchase its own 
acceptances, but such a transaction is equivalent to 
a loan or advance to the customer for whom the ac- 



Bank Acceptances 25 

ceptance was made and the liability of such cus- 
tomer becomes subject to the limitations of section 
5200, Revised Statutes. 

The limitations imposed by section 5200, Re- ^ h '° ca n b ° 1 t e 
vised Statutes, on the amount of money which may 
be borrowed by any individual from a member bank 
do not apply to acceptances of such bank. 

(Opinion of Counsel, Page 680, December, 1916, Bulletin.) 

Where a national bank has already loaned 10 per f^SS^ % 
cent of its capital and surplus to a certain company, to loan$. 
it may, while the loan is still outstanding, obligate 
itself as acceptor on a draft drawn by the same 
company. 

If, however, the member bank discounts its own Exception, 
acceptance under the foregoing circumstances, it 
must treat the transaction as a loan and not as an 
acceptance, and could not in that case lend to, and 
accept for, the same firm in an aggregate amount in 
excess of the 10 per cent prescribed by section 5200. 

(Informal Ruling, Page 197, March, 1918, Bulletin.) 

The ten per cent limitation imposed by section ^"J™''^ 
5200 of the Revised Statutes is not intended to ap- f nn d s to meet 
ply to the mere acceptance of a bill of exchange, acceptance, 
but the provisions of section 5200 would apply to 
the indebtedness arising between the drawer of the 
bill and the accepting bank in case the drawer fails 
to furnish funds with which to meet the acceptance 
at maturity. 

(Informal Ruling, Page 64, February, 1916, Bulletin; re- 
peated from Page 269, September, 1915, Bulletin.) 



Note: The limitations imposed by the Federal Reserve 
Act on the amount a bank may accept for any one interest 
apply to drafts "whether in a foreign or domestic transaction." 
The 10 per cent limit, therefore, applies to the aggregate of 
both domestic and foreign drafts accepted for one interest. 



26 



Commercial Banking Practice 



AGGREGATE AMOUNT BANK 
MAY ACCEPT 

Statutory Provisions 



Fifty per 
cent limit. 



Acceptances 

up to 100 per cent. 



"No bank shall accept such bills to an amount 
equal at any time in the aggregate to more than 
one-half of its paid-up and unimpaired capital stock 
and surplus: 

"Provided, however, that the Federal Reserve 
Board, under such general regulations as it may pre- 
scribe, which shall apply to all banks alike regard- 
less of the amount of capital stock and surplus, may 
authorize any member bank to accept such bills to 
an amount not exceeding at any time in the aggre- 
gate one hundred per centum of its paid-up and 
unimpaired capital stock and surplus. . . ." 

(Federal Reserve Act, Section 13.) 



Application 
for power to 
accept up to 
100 per cent. 



Report on 
application. 



Regulations of Federal Reserve Board 

Under the provisions of the law ... the 
Federal Reserve Board has determined that any 
member bank, having an unimpaired capital equal 
to at least twenty per centum of its paid-up capital, 
which desires to accept drafts or bills of exchange 
. . . up to an amount not exceeding at any 
time in the aggregate one hundred per centum of 
its paid-up and unimpaired capital stock and sur- 
plus, may file an application for that purpose with 
the Federal Reserve Board. Such application must 
be forwarded through the Federal reserve bank of 
the district in which the applying bank is located. 

The Federal reserve bank shall report to the 
Federal Reserve Board upon the standing of the 
applying bank, stating whether the business and 
banking conditions prevailing in its district war- 
rant the granting of such application. 



Bank Acceptances 27 

The approval of any such application may be Reversal , of 
rescinded upon 90 days' notice to the bank af- 
fected. 

(Regulations of Federal Reserve Board, Regulation C, 
Series of 1917, A, II.) ' 



Opinions and Rulings 



Authority from the Federal Reserve Board is Permission to 
not necessary for a member bank to undertake ac- 50 per cent 
ceptance business, unless the bank wishes to exceed not r eq« ired - 
50 per cent of its capital and surplus. 

(Informal Ruling, Page 126, July, 1915, Bulletin.) 

Drafts accepted by foreign correspondents at Acce P tances of 

ill o •! correspondents 

the request and under the guarantee 01 a national under guarantee 
bank in the United States should be reported as a of national bank * 
direct liability of such national bank, and should be 
treated as subject to the limitations imposed by the 
Federal Reserve Act on the acceptance power of 
national banks. 

(Opinion of Counsel, Page 311, April, 1918, Bulletin.) 

When a member bank purchases its own accept- r ar j^ a,e of 
ance before maturity such acceptance need not be acceptance, 
included in the aggregate of acceptances author- 
ized by section 18. 

(Opinion of Counsel, Page 397, August, 1916, Bulletin. 
See also "Purchase by National Bank of Its Own Accept- 
ances," pages 45-46, below.) 

The limitations imposed by section 5202, Re- Lim i ta n tJo 5 n 2 3 2 f 
vised Statutes, on the liabilities incurred by any 
national bank do not apply to acceptances of such 
banks. 

(Opinion of Counsel, Page 680, December, 1916, Bulletin.) 



28 Commercial Banking Practice 

General By way of general summary it may be said : 

(1) A member bank may not accept bills to a 
greater amount than 50% of its capital and sur- 
plus (unless the Federal Reserve Board has au- 
thorized it to accept 100%) ; 

(2) The amount of domestic bills accepted 
shall in no event exceed 50% of capital and surplus; 

(3) Acceptances purchased by the accepting 
bank are exempt from the above limitations. 






29 



Sank Acceptances Executed to 
Furnish Dollar Exchange 



CHARACTER 



Statutory Provisions 

"Any member bank may accept drafts or bills of Acceptances 
exchange drawn upon it having not more than three exchange, 
months' sight to run, exclusive of days of grace, 
drawn under regulations to be prescribed by the 
Federal Reserve Board by banks or bankers in for- 
eign countries or dependencies or insular posses- 
sions of the United States for the purpose of fur- 
nishing dollar exchange as required by the usages of 
trade in the respective countries, dependencies, or 
insular possessions. . . ." 

(Federal Reserve Act, Section 13.) 

Regulations of Federal Reserve Board 

Any member bank desiring to accept drafts Application for 
drawn by banks or bankers in foreign countries or to'I^ept? 
dependencies or insular possessions of the United 
States for the purpose of furnishing dollar ex- 
change shall first make an application to the Fed- 
eral Reserve Board setting forth the usages of trade 
in the respective countries, dependencies, or insular 
possessions in which such banks or bankers are lo- 
cated. 

If the Federal Reserve Board should determine Conditions 
that the usages of trade in such countries, depen- ° approva - 
dencies, or possessions require the granting of the 



30 



Commercial Banking Practice 



acceptance facilities applied for, it will notify the 
applying bank of its approval and will also publish 
in the Federal Reserve Bulletin the name or names 
of those countries, dependencies, or possessions in 
which banks or bankers are authorized to draw on 
member banks whose applications have been ap- 
proved for the purpose of furnishing dollar ex- 
change. 

The Federal Reserve Board reserves the right to 
modify or on 90 days' notice to revoke its approval 
either as to any particular member bank or as to 
any foreign country or dependency or insular pos- 
session of the United States in which it has author- 
ized banks or bankers to draw on member banks for 
the purpose of furnishing dollar exchange. 

(Regulations of Federal Reserve Board, Regulation C, 
Series of 1917, B, II.) 



Purpose 
of law. 



Countries whose 
trade usages do 
not require such 
acceptances. 



Announcements of Federal Reserve Board 

The purpose of this act and the regulation made 
pursuant thereto was to enable the American banks 
to provide dollar exchange in countries where the 
check is not the current means of remittance in pay- 
ment of foreign debts, but where the three months' 
bankers' draft is generally used for that purpose. 

(Announcement of Federal Reserve Board, Page GQ5, 
December, 1916, Bulletin.) 

The Board is informed that the bankers' custom 
of selling three months' drafts in preference to 
checks originated in countries where the mail con- 
nections were irregular and the foreign-exchange 
market was a limited one, and where it would have 
been difficult for the drawing banker to be certain 
that he could find a cover against the checks drawn 
by him in time to forward it by the same mail, 
whereas, in drawing a three months' draft, he would 
feel assured of being able to forward remittances 
before his obligation fell due. Such conditions do 



Bank Acceptances 81 

not exist in relations between England and France 
and the United States. 

(Announcement of Federal Reserve Board, Page 665, 
December, 1916, Bulletin.) 



Countries whose 
trade usages 



Reserving the right to modify or revoke its ap- 
proval on 90 days' notice, the Board has decided to warrant such 
permit member banks to accept foreign drafts acce P taDce »- 
drawn upon them by banks or bankers in the fol- 
lowing countries: Porto Rico, Santo Domingo, 
Costa Rica, Peru, Chile, Brazil, Venezuela, Argen- 
tina, and Bolivia. 

It is understood that such drafts are to be drawn 
for the purpose of furnishing dollar exchange as 
required by the usages and trade in the respective 
countries. 

(Announcement of Federal Reserve Board, Page 665, 
December, 1916, Bulletin.) 

The following named countries have been added 
to the above list: Colombia, Nicaragua, Ecuador, 
Trinidad, and Uruguay. 

MATURITY 

Statutory Provisions 

Member banks may accept drafts drawn to Maturity not 
furnish dollar exchange "having not more than £ r *e m'tths. 
three months' sight to run, exclusive of days of 
grace. ..." 

(Federal Reserve Act, Section 13.) 

AMOUNT MEMBER BANK MAY ACCEPT 
FOR ONE INTEREST 

Statutory Provisions 

"No member bank shall accept such drafts or J e e ° t ^ it 
bills of exchange referred to in this paragraph for 



S2 



Commercial Banking Practice 



any one bank to an amount exceeding in the aggre- 
gate ten per centum of the paid-up and unimpaired 
capital and surplus of the accepting bank unless the 
draft or bill of exchange is accompanied by docu- 
ments conveying or securing title or by some other 
adequate security. . . ." 

(Federal Reserve Act, Section 13.) 

AGGREGATE AMOUNT MEMBER 
BANK MAY ACCEPT 



Fifty per 
cent limit. 



Separate limits 
on the two 
classes of 
acceptances. 



Section 5202 
not applicable. 



Statutory Provisions 

"No member bank shall accept such drafts or 
bills in an amount exceeding at any time the aggre- 
gate of one-half of its paid-up and unimpaired cap- 
ital and surplus." 

(Federal Reserve Act, Section 13.) 

Opinions and Rulings 

"The 50 per cent limit imposed upon the amount 
of drafts which a member bank may accept for the 
purpose of furnishing dollar exchange is separate 
and distinct from and not included in the limits im- 
posed by section 13 upon the amount of drafts or 
bills of exchange drawn against the shipment of 
goods or against warehouse receipts covering readi- 
ly marketable staples, which a member bank may 
accept." 

Member banks may therefore accept such bills 
even though their acceptances for other purposes 
aggregate 50% (or 100%) of capital and surplus. 

(Opinion of Counsel, Page 528, July, 1917, Bulletin.) 

The limitations imposed by section 5202, Re- 
vised Statutes, on the liabilities incurred by any 
national bank do not apply to acceptances of such 
banks. 

(Opinion of Counsel, Page 680, December, 1916, Bulletin.) 



ss 



Bank Acceptances Based on Do- 
mestic Shipments of Goods 

CHARACTER 

Statutory Provisions 

"Any member bank may accept drafts drawn Acceptances 
upon it . . . which grow out of transactions I° a de me$tIC 
involving the domestic shipment of goods provided 
shipping documents conveying or securing title are 
attached at the time of acceptance. . . ." 

(Federal Reserve Act, Section 13.) 

Opinions and Rulings 

Shipping Documents. 

Under the provision of section 13, which author- Character 
izes any member bank to accept drafts based upon of document, • 
domestic shipments of goods, provided shipping 
documents conveying or securing title are attached, 
such documents must be made out or indorsed so as 
to convey or secure title to the accepting bank. 

(Opinion of Counsel, Page 198, March, 1918, Bulletin.) 

A provision of section 13 which authorizes any Documents not 
member bank to accept drafts based upon the J^hyLaV 
domestic shipment of goods, provided shipping attached, 
documents are "attached," should not be construed 
so as to require that the documents be physically 
fastened to the draft. It is sufficient if the accept- 
ing bank has possession of the documents at the 
time of acceptance. If placed in possession of the 
bank's agent and under control of the bank, such 
documents could clearly be considered as in its 
possession. 

(Opinion of Counsel, Page 765, October, 1917, Bulletin.) 



34 



Commercial Banking Practice 



Shipment from 

principal 

to agent. 



Maturity. 



Eligibility for 
acceptance not 
dependent on 
security alone. 



Release of 

shipping 

documents. 



Transaction Need Not Involve Sale of Goods. 

A member bank may properly accept a draft 
drawn against the shipment of goods from a corpo- 
ration to its agent or branch even though no sale of 
the goods is involved in the transaction. 

In any case, where a draft is drawn against a 
shipment of goods in a transaction which does not 
involve the sale of those goods, the maturity of the 
draft should approximate the duration of their 
transit. In such a case the law contemplates that 
the acceptance of the draft should be for the pur- 
pose of financing the shipment, and that it should 
not be the means of furnishing a credit for any other 
purpose. 

(Informal Ruling, Page 690, September, 1917, Bulletin.) 
Acceptance Must Arise Out of Actual Transaction. 

A draft drawn by the purchaser of the goods 
against a national bank is not eligible for accept- 
ance by that bank merely because it is secured by a 
bill of lading covering the goods bought. 

The law contemplates some actual connection be- 
tween the acceptance of the draft and the transac- 
tion involving the sale and shipment of the goods — 
that is, it was evidently intended that the draft 
should be drawn to finance that transaction. If a 
seller ships goods and mails the bill of lading to the 
purchaser and on arrival of the bill of lading the 
purchaser draws on his own bank, attaching the bill 
of lading as security, and offers it for acceptance, 
the transaction is merely a straight loan to the 
drawer secured by a bill of lading. As such it would 
not come within the spirit of the provisions of sec- 
tion 13. 

(Opinion of Counsel, Page 380, May, 1917, Bulletin.) 
Retention or Release of Documents against Acceptance. 

Question is whether it is necessary, where a do- 
mestic acceptance is based upon a bill of lading, that 
the bank retain the bill of lading or other collateral 



warehouse 
receipts. 



BankAcceptances 85 

during the life of the acceptance, or may the bank 
release the bill of lading after acceptance. Also, 
whether the same rule will apply in case the accept- 
ance is secured by a warehouse receipt. 

Inasmuch as the statute merely requires the ac- 
cepting bank to be secured in domestic transactions 
by shipping documents or warehouse receipts at the 
time of acceptance, the bank would no doubt have 
the right, if it became necessary to do so, to release 
either the shipping document or the warehouse re- 
ceipt, provided the draft or drafts accepted for one 
person did not exceed 10 per cent of the capital 
and surplus of the accepting bank. This is a ques- 
tion, however, which should be determined by the 
bank itself. 

It is no doubt necessary in some instances for the Release of 
bank to release the shipping documents under some 
agreement with its customer in order that the trans- 
action may be consummated. There would seem to 
be much less reason for releasing the warehouse re- 
ceipts, and the banks might very properly adopt the 
rule not to release warehouse receipts other than in 
exceptional cases. In any event, this is purely a 
matter of agreement as between the bank and its 
customers. The Federal reserve bank in redis- 
counting such acceptances may reasonably take into 
consideration the question whether or not they are 
secured or unsecured at the time they are offered 
for rediscount. 

(Informal Ruling, Page 634!, July, 1918, Bulletin.) 

MATURITY 

Statutory Provisions 

Any member bank may accept such drafts drawn Maturity not to 
upon it, "having not more than six months' sight to exceed " x montb} - 
run, exclusive of days of grace." 

(Federal Reserve Act, Section 13.) 



56 



Commercial Banking Practice 



Credit agreement 
for more than 
six months. 



Syndicate accept- 
ance credits. 



Opinions and Rulings 

Duration of Letters of Credit. 

While a letter of credit or credit agreement may 
be lawfully made by a national bank which will ex- 
tend by its terms for a period exceeding six months, 
the agreement must not be of such a character as 
will impose upon the holders of the drafts accepted 
thereunder any obligation to renew such drafts so 
that the period of acceptance shall exceed six 
months in duration as to any specified draft. 

(Informal Ruling, Page 269, September, 1915, Bulletin.) 

For statement of policy of Federal Reserve 
Board with regard to syndicate acceptance credits 
having a duration of several years, see "Syndicate 
Acceptance Credits," pages 14-15, above. 



Fifty per 
cent limit. 



AMOUNT BANK MAY ACCEPT FOR 

ONE INTEREST 

See, under "Bank Acceptances Based on Im 
ports and Exports," pages 23-25, above. 



Acceptances np 
to 100 per cent. 



AGGREGATE AMOUNT BANK 
MAY ACCEPT 

Statutory Provisions 

"No bank shall accept such bills to an amount 
equal at any time in the aggregate to more than 
one-half of its paid-up and unimpaired capital 
stock and surplus : 

"Provided, however, that the Federal Reserve 
Board, under such general regulations as it may 
prescribe, which shall apply to all banks alike re- 
gardless of the amount of capital stock and surplus, 
may authorize any member bank to accept such bills 



Bank Acceptances 37 

to an amount not exceeding at any time in the ag- 
gregate one hundred per centum of its paid-up and 
unimpaired capital stock and surplus:* 

"Provided, further, that the aggregate of accept- Domestic accept- 
ances growing out of domestic transactions shall in excee/so per cent, 
no event exceed fifty per centum of such capital 
stock and surplus." 

(Federal Reserve Act, Section IS.) 

Opinions and Rulings 

When a member bank purchases its own accept- ^J as J ® f 
ance before maturity such acceptance need not be acceptances, 
included in the aggregate of acceptances authorized 
by section 13. 

(Opinion of Counsel, Page 397, August, 1916, Bulletin. 
See also "Purchase by National Bank of Its Own Accept- 
ances," pages 45-46, below.) 

The limitations imposed by section 5202, Re- ^« not 5 fpply 
vised Statutes, on the liabilities incurred by any to acceptances, 
national bank do not apply to acceptances of such 
banks. 

(Opinion of Counsel, Page 680, December, 1916, Bulletin.) 



*For regulations governing acceptance of domestic and for- 
eign drafts up to an aggregate of 100 per cent of bank's capital 
and surplus, see "Bank Acceptances Based on Imports and 
Exports/' pages 26-28, above. 



38 



Bank Acceptances Secured by 
Warehouse Receipts 



CHARACTER 

Statutory Provisions 

"Any member bank may accept drafts or bills of 
exchange drawn upon it . . . which are se- 
cured at the time of acceptance by a warehouse re- 
ceipt or other such document conveying or secur- 
ing title covering readily marketable staples." 

(Federal Reserve Act, Section 13.) 



Warehouse receipts 
must be issued by 
independent 
warehouses. 



Opinions and Rulings 

Eligible Security. 

Warehouse receipts offered as security for bills 
accepted b}^ member banks must be issued by ware- 
houses which are independent of the borrower. 

Where a corporation is formed as a subterfuge 
for the purpose of evading the spirit of the Board's 
ruling, this fact should be taken into consideration 
by a member bank accepting the bill and by the 
Federal reserve bank to which it is offered for dis- 
count. 

If the borrower exercises such control over the 
corporation issuing the warehouse receipt as to give 
him control over the goods in storage, the purpose 
of requiring a receipt of the independent ware- 
houseman would be defeated. The corporation is- 
suing such receipt must be organized in good faith 
as an independent corporation and its affairs must 



Bank Acceptances 39 

be administered by duly authorized officers and 
agents independent of the borrower. 

(Informal Ruling, Page 31, January, 1918, Bulletin; see 
also Informal Ruling, Page 30, January, 1917, Bulletin.) 

Relation between 



The requirements of the Board appear to have borrower and 



ware- 



been met where a separate corporation has been house corporation, 
created and the warehouse receipts are issued by 
that corporation and not by the borrower. How- 
ever, where both corporations have practically the 
same officers, the manager of the warehouse ap- 
pointed to execute the receipts should not be an 
employee of the borrowing company, as the Board 
requires that the receipts should be issued by a 
company independent of the borrower, and this re- 
quirement should be met in substance as well as in 
form. 

(Informal Ruling, Page 862, September, 1918, Bulletin.) 

A borrowing corporation takes receipts for goods 
and materials stored in a warehouse controlled by a 
separate corporation engaged solely in the ware- 
house business, the entire stock of which is owned 
by the prospective borrower. 

If a representative of the accepting bank is given ^f/^jj b 
control of the warehouse under a proper resolution acceptors' 
of the directors of the warehouse corporation, the re P resentatIve - 
fact that the stock of the corporation is owned by 
the borrower should not prevent the acceptance of 
drafts secured by the warehouse receipts. 

It should be agreed, however, that if by any fu- 
ture action of the warehouse corporation an attempt 
is made to exercise control over the warehouse, the 
representative of the acceptor should have the right 
to move the goods and to place them in storage else- 
where at the expense of the warehouse corporation. 

(Informal Ruling, Page 862, September, 1918, Bulletin.) 

A canned goods concern proposes to place part •^*^ by e ieMee. pt * 
of its readily marketable goods and materials in 



40 



Commercial Banking Practic 



storage with a lessee of part of its premises. The 
lessee is then to issue warehouse receipts to the 
owner of the goods, which receipts are to be used as 
security for drafts drawn against and accepted by 
a member bank. 

If the premises in question are actually turned 
over to the lessee under a bona fide lease, the lessee 
being independent of the borrower and having en- 
tire custody and control of the goods, there would 
seem to be no objection to a member bank accept- 
ing drafts against the security of warehouse receipts 
issued by such lessee. It should, however, be ex- 
pressly understood and agreed that the borrower 
shall not have access to the premises except with the 
permission of the lessee and that he shall exercise no 
control of any sort over the goods against which 
warehouse receipts are issued. The warehouse re- 
ceipts must, of course, be in form to properly con- 
vey and secure title to the bank. 

(Informal Ruling, Page 634, July, 1918, Bulletin.) 



Receipt of cus- 
todian of wool as 
warehouse receipt. 



It being understood that wool is stored in build- 
ings under control of custodian entirely indepen- 
dent of borrower, custodian's certificate or receipt, 
if issued in proper form to convey or secure title, 
may be treated as a warehouse receipt within the 
meaning of section 13 of the Federal Reserve Act 
and acceptance of member bank under such condi- 
tions would be eligible for rediscount. 

(Informal Ruling, Page 636, July, 1918, Bulletin.) 



Acceptance of 
drafts against 
sngar in bond. 



It is the understanding of this office that sugar 
referred to is placed in bond under transit entry 
and warehouse receipt issued by collector in nego- 
tiable form, but sugar can not be withdrawn for 
domestic sale or consumption without special per- 
mission of Treasury Department. Board is of 
opinion that member banks may legally accept 



Bank Acceptance! 41 

draf ts drawn against security of such warehouse re- 
ceipt properly assigned. 

(Informal Ruling, Page 520, June, 1918, Bulletin.) 
Ineligible Security. 

Drafts or bills of exchange drawn in domestic chattel 
transactions against a national bank cannot, under """t***"- 
authority of section 13, be accepted when secured 
by a chattel mortgage on cattle but only when ac- 
companied by shipping documents or when secured 
by a warehouse receipt or other similar document 
conveying or securing title to readily marketable 
staples. 

While cattle may be treated as readily marketable 
staples, a chattel mortgage is not considered a docu- 
ment similar to a warehouse receipt since the bor- 
rower retains the possession of the goods and con- 
veys to the bank only the legal title. 

(Informal Ruling, Page 309, April, 1918, Bulletin.) 

A national bank is not authorized to accept a Collateral 
draft secured by collateral notes which are in turn J ot ^aST** 
secured by chattel mortgages on cattle. mortgage*. 

(Informal Ruling, Page 690, September, 1917, Bulletin.) 

Member banks are not authorized to accept drafts 
of a cattle-loan company secured by notes of the 
owner of the cattle, although such notes may be se- 
cured by a chattel mortgage executed by the owner 
of the cattle to the cattle-loan company and the 
notes and chattel mortgage accompany the draft at 
the time of acceptance. 

(Opinion of Counsel, Page 871, September, 1918, Bulletin.) 

A bill of sale is not a receipt similar to a ware- Bills of sale, 
house or terminal receipt ; it is merely in substance 
a chattel mortgage to goods in the hands of the 
drawer and not a receipt for goods sold in the hands 
of some third party "independent of the borrower." 

(Opinion of Counsel, Page 684, December, 1916, Bulletin.) 



42 



Commercial Banking Phactic 



Secority not 
specified. 



The acceptance of a draft by a member bank 
against an acceptance agreement which purports to 
assign to the bank certain collateral security, but 
which does not specifically mention any security as 
assigned, is an ordinary accommodation acceptance, 
and is not authorized by law. 

(Opinion of Counsel, Page 311, April, 1918, Bulletin.) 



Substitution. 



Substitution of Warehouse Receipts. 

It is held that there is no objection to permitting 
mills to substitute other warehouse receipts for cot- 
ton receipts during the life of an acceptance. 

(Informal Ruling, Page 30, January, 1917, Bulletin.) 

For a ruling governing the release of warehouse receipts 
after acceptance, see page 35, above. 



MATURITY 

See, under "Bank Acceptances Based on Domes- 
tic Shipments of Goods," pages 35-36, above. 



AMOUNT BANK MAY ACCEPT FOR 
ONE INTEREST 

See, under "Bank Acceptances Based on Im- 
ports and Exports," pages 23-25, above. 

AGGREGATE AMOUNT BANK 
MAY ACCEPT 



See, under "Bank Acceptances Based on Domes- 
tic Shipments of Goods," pages 36-37, above. 



43 



Investment in Acceptances by 
Member Banks 

Statutory Provisions 

"The total liabilities to any association, of any Ten per cent limit 
person, or of any company, corporation, or firm for one^iSer e»t °to " T 

money borrowed, including in the liabilities of a national bank, 
company or firm the liabilities of the several mem- 
bers thereof, shall at no time exceed ten per centum 
of the amount of the capital stock of such associa- 
tion, actually paid in and unimpaired, and ten per 
centum of its unimpaired surplus fund: Provided, 
however, that ( 1 ) the discount of bills of exchange Exception of 
drawn in good faith against actually existing val- d j 8Count of bil, » 
ues, (2) the discount of commercial or business JusfnVi^pap*" 
paper actually owned by the person, company, cor- 
poration, or firm, negotiating the same, and (3) the 
purchase or discount of any note or notes secured Paper secured 
by not less than a like face amount of bonds of the obligations. 
United States issued since April 24, 1917, or cer- 
tificates of indebtedness of the United States, shall 
not be considered as money borrowed within the 
meaning of this section; but the total liabilities to 
any association, of any person, or of any company, 
corporation, or firm, upon any note or notes pur- 
chased or discounted by such association and secured 
by such bonds or certificates of indebtedness, shall 
not exceed (except to the extent permitted by rules 
and regulations prescribed by the Comptroller of 
the Currency, with the approval of the Secretary of 
the Treasury) ten per centum of such capital stock 
and surplus fund of such association.' ' 

(U. S. Revised Statutes, Section 5200, as amended Septem- 
ber 24, 1918.) 



44 



Commercial Banking Practice 



"Bill! of 

exchange" include 
bank acceptances. 



Bills discounted 
before acceptance. 



Secured by shipping 
documents or 
pledge of goods. 



Bills discounted 
after acceptance. 



Acceptance 
discounted after 
removal of 
attacked 
documents. 



Opinions and Rulings 

Purchase or Discount of Acceptances of Other Banks. 

"Bills of exchange" may be taken as including 
acceptances, since a bill does not lose its character- 
istics as such when accepted by the drawee. 

(Opinion of Counsel, Page 195, March, 1917, Bulletin.) 

A bill of exchange discounted before acceptance 
may be said to be drawn against actually existing 
value . . . only when it is accompanied by 
shipping documents, warehouse receipts, or other 
papers securing title to the goods sold. 

(Opinion of Counsel, Page 195, March, 1917, Bulletin.) 

A bill secured by shipping documents, or by the 
pledge of goods actually sold, might be discounted 
by a member bank before acceptance without being 
subject to the limitations imposed by section 5200, 
since this would constitute a bill drawn in good 
faith against actually existing value. 

(Opinion of Counsel, Page 683, December, 1916, Bulletin.) 

If the bill is discounted after acceptance it may 
be treated as drawn against existing values if drawn 
against the drawee at the time of, or within a rea- 
sonable time after, the shipment or delivery of the 
goods sold. There must be reasonable grounds to 
believe at the time the bill is drawn that the goods 
are in existence in the hands of the drawee either 
in their original form or in the shape of the proceeds 
of their sale. 

(Opinion of Counsel, Page 195, March, 1917, Bulletin.) 

When such bill has been accepted by the drawee 
and the documents attached have been removed, 
though the direct obligation of the drawee to pay 
such bill at maturity may be said to be substituted 
for the "actual value" against which the bill was 



Bank Acceptances 45 

originally drawn, nevertheless, when discounted by 
a bona fide owner for value, its discount would not 
be subject to the limitations of section 5200, since 
it would still come within the classification of "com- 
mercial or business paper actually owned by the 
person negotiating the same." 

Should the drawee who accepts the bill, however, 
attempt to discount it with a member bank it would 
be subject to the limitations of section 5200, since 
in that case the party primarily liable would in ef- 
fect borrow money from the bank on his own ob- 
h'gation. 

(Opinion of Counsel, Page 683, December, 1916, Bulletin.) 

The Board finds it necessary to adhere to its es- Di » eonn * •* 
tablished policy of not making any general ruling IVsiLn Tap", 
on the question of how much a bank may invest in 
any particular security. It held, however, that if 
a firm is a bona fide owner for value of the accept- 
ances of any particular institution and such accept- 
ances are sold to or discounted with a member bank, 
the acceptances could no doubt be treated as com- 
mercial or business paper actually owned by the 
party negotiating them and would therefore be ex- 
cepted from the limitations of section 5200, Re- 
vised Statutes. Ruling rests upon the fact that 
paper is commercial or business paper actually 
owned by the person negotiating it. 

(Informal Ruling, Page 678, December, 1916, Bulletin.) 
Purchase by National Sank of Its Own Acceptances. 

A member bank may legally purchase its own ac- Bank may 
ceptances, but such a transaction is equivalent to a £"„ acceptances, 
loan or advance to the customer for whom the ac- 
ceptance was made and the liability of such cus- 
tomer becomes subject to the limitations of section 
5200, Revised Statutes. 

(Opinion of Counsel, Page 680, December, 1916, Bulletin.) 



46 



Commercial Banking Practice 



Exemption from 
limitations of 
Section 13. 



Reissuance of 
acceptances. 



Rediscount of 
sock acceptances. 



When a bank purchases its own acceptance be- 
fore maturity such acceptance need not be included 
in the aggregate of acceptances authorized by sec- 
tion 13. 

(Opinion of Counsel, Page 397, August, 1916, Bulletin.) 

While the Board has ruled that when a bank buys 
its own acceptances they are to be recorded as loans 
subject to the limitations of section 5200, the right 
of the bank to resell or reissue the acceptance is, in 
the opinion of counsel, fully recognized by the au- 
thorities, and where this is done they may be treated 
as acceptances outstanding and not as loans. 

(Informal Ruling, Page 691, September, 1917, Bulletin.) 

An acceptance which has been purchased by the 
accepting bank and subsequently rediscounted with 
its Federal Reserve Bank is not subject to the lim- 
itations of section 5200 of the Revised Statutes. 

(Opinion of Counsel, Page 696, September, 1917, Bulletin.) 



PART II. 



Rediscounts 

with 

Federal Reserve 
Banks 



40 



PART II. 



Rediscounts with Federal 
Reserve Banks 

General Statutory Provisions 



Member banks of the Federal Reserve System 
are authorized to rediscount notes, drafts, bills of 
exchange, and bank acceptances with Federal re- 
serve banks under the following provisions of the 
Federal Reserve Act: 

"Upon the indorsement of any of its member Notes, draft*, and 
banks, which shall be deemed a waiver of demand, biUs of exchan * e - 
notice, and protest by such bank as to its own in- 
dorsement exclusively, any Federal reserve bank 
may discount notes, drafts, and bills of exchange 
arising out of actual commercial transactions ; that Commercial paper, 
is, notes, drafts, and bills of exchange issued or 
drawn for agricultural, industrial, or commercial 
purposes, or the proceeds of which have been used, 
or are to be used, for such purposes, the Federal 
Reserve Board to have the right to determine or 
define the character of the paper thus eligible for 
discount, within the meaning of this Act. Nothing Agricultural and 
in this Act contained shall be construed to prohibit commodit y P*P er - 
such notes, drafts, and bills of exchange, secured by 
staple agricultural products, or other goods, wares, 
or merchandise, from being eligible for such dis- 
count; but such definition shall not include notes, 



50 



Commercial Banking Practice 



Ineligible paper. 



Maturity of 
eligible paper. 



Amount rediscount- 
able by one bank 
bearing signature 
of any one interest. 



Bank acceptances 
eligible for 
rediscount. 



Rediscounts for 
member State banks. 



drafts, or bills covering merely investments or is- 
sued or drawn for the purpose of carrying or trad- 
ing in stocks, bonds, or other investment securities, 
except bonds and notes of the Government of the 
United States. Notes, drafts, and bills admitted 
to discount under the terms of this paragraph must 
have a maturity at the time of discount of not more 
than ninety days, exclusive of days of grace: Pro- 
vided, that notes, drafts, and bills drawn or issued 
for agricultural purposes or based on live stock 
and having a maturity not exceeding six months, 
exclusive of days of grace, may be discounted in an 
amount to be limited to a percentage of the assets 
of the Federal reserve bank, to be ascertained and 
fixed by the Federal Reserve Board. 

"The aggregate of such notes, drafts, and bills 
bearing the signature or indorsement of any one 
borrower, whether a person, company, firm, or cor- 
poration, rediscounted for any one bank, shall at no 
time exceed ten per centum of the unimpaired capi- 
tal and surplus of said bank; but this restriction 
shall not apply to the discount of bills of exchange 
drawn in good faith against actually existing 
values. 

"Any Federal reserve bank may discount ac- 
ceptances of the kinds hereinafter described, which 
have a maturity at the time of discount of not more 
than three months' sight, exclusive of days of grace, 
and which are indorsed by at least one member 
bank."* 

(Federal Reserve Act, Section IS.) 

"No Federal reserve bank shall be permitted to 
discount for any [member] State bank or trust 
company notes, drafts, or bills of exchange of any 



* For kinds of acceptances eligible for rediscount under this 
section, see Part I, "General Statutory Provisions/' pages 
11-12, above. 



Rediscounts 51 

one borrower who is liable for borrowed money to 
such State bank or trust company in an amount 
greater than ten per centum of the capital and sur- 
plus of such State bank or trust company, but the 
discount of bills of exchange drawn against act- 
ually existing value and the discount of commer- 
cial or business paper actually owned by the person 
negotiating the same shall not be considered as bor- 
rowed money within the meaning of this section. 
The Federal reserve bank, as a condition of the Condition, 
discount of notes, drafts, and bills of exchange for 
such State bank or trust company, shall require a 
certificate or guaranty to the effect that the bor- 
rower is not liable to such bank in excess of the 
amount provided by this section, and will not be 
permitted to become liable in excess of this amount 
while such notes, drafts, or bills of exchange are 
under discount with the Federal reserve bank." 
(Federal Reserve Act, Section 9.) 

"No member bank shall act as the medium or f Procnrin * discount. 

. tor nonmembers. 

agent of a nonmember bank m applying for or 
receiving discounts from a Federal reserve bank 
under the provisions of this Act, except by permis- 
sion of the Federal Reserve Board." 
(Federal Reserve Act, Section 19.) 

"The discount and rediscount and the purchase J^^'j'JjJ*" 
and sale by any Federal reserve bank of any bills Board, 
receivable and of domestic and foreign bills of ex- 
change, and of acceptances authorized by this Act, 
shall be subject to such restrictions, limitations, and 
regulations as may be imposed by the Federal 
Reserve Board." 

(Federal Reserve Act, Section IS.) 

"The Federal reserve banks shall be authorized, Security of War 
subject to the maturity limitations of the Federal bonds! 6 o^p0^a,OI, 
Reserve Act and to regulations of the Federal 
Reserve Board, to discount the direct obligations 



52 Commercial Banking Practice 

of member banks secured by . . . bonds of the 
[War Finance] Corporation and to rediscount eli- 
gible paper secured by such bonds and indorsed by 
a member bank." 

(War Finance Corporation Act, Section IS.) 



5$ 



General Regulations of Federal 
Reserve Board 



SUMMARY OF STATUTORY 
PROVISIONS 



Any Federal reserve bank may discount for any 
of its member banks any note, draft, or bill of ex- 
change provided: 

(a) It has a maturity at the time of discount of Matn "*y- 
lot more than 90 days, exclusive of days of grace; 

out if drawn or issued for agricultural purposes or 
based on live stock, it may have a maturity at the 
time of discount of not more than six months, ex- 
clusive of days of grace ; 

(b) It arose out of actual commercial transac- Commercial 
tions ; that is, it must be a note, draft, or bill of ex- c arac er * 
change which has been issued or drawn for agri- 
cultural, industrial, or commercial purposes, or the 
proceeds of which have been used or are to be used 

for such purposes; 

(c) It was not issued for carrying or trading in Finance paper 
stocks, bonds, or other investment securities, ex- Inell * ible - 
cept bonds and notes of t the Government of the 

United States; 

(d) The aggregate of notes, drafts, and bills Ten per cent limit. 
bearing the signature or indorsement of any one 
borrower, whether a person, company, firm, or cor- 
poration, rediscounted for any one member bank, 

shall at no time exceed ten per cent of the unim- 
paired capital and surplus of such bank; but this 
restriction shall not apply to the discount of bills of 



54 



Commercial Banking Practice 



Indorsement 



exchange drawn in good faith against actually ex- 
isting values ; 

(e) It is indorsed by a member bank ; 

(f) It conforms to all applicable provisions of 
this regulation. 

(Regulations of Federal Reserve Board, Regulation A, 
Series of 1917, A, I.) 



ELIGIBILITY OF NOTES, DRAFTS, 
AND BILLS OF EXCHANGE 



Commercial paper. 



Finance paper 
ineligible. 



Collateral 

security. 



The Federal Reserve Board, exercising its statu- 
tory right to define the character of a note, draft, or 
bill of exchange eligible for rediscount at a Federal 
reserve bank, has determined that: 

(a) It must be a note, draft, or bill of exchange 
the proceeds of which have been used or are to be 
used in producing, purchasing, carrying, or market- 
ing goods* in one or more of the steps of the pro- 
cess of production, manufacture, or distribution; 

(b) It must not be a note, draft, or bill of ex- 
change the proceeds of which have been used or are 
to be used for permanent or fixed investments of 
any kind, such as land, buildings, or machinery ; 

(c) It must not be a note, draft, or bill of ex- 
change the proceeds of which have been used or are 
to be used for investments of a purely speculative 
character ; 

(d) It may be secured by the pledge of goods or 
collateral, provided it is otherwise eligible. 

(Regulations of Federal Reserve Board, Regulation A, 
Series of 1917, A, II.) 



*When used in this regulation the word "goods" shall be 
construed to include goods, wares, merchandise, or agricultural 
products, including live stock. 



Rediscounts 55 

APPLICATIONS FOR REDISCOUNT 

All applications for the rediscount of notes, Certificate of 



drafts, or bills of exchange must contain a certifi- 
cate of the member bank, in form to be prescribed 
by the Federal reserve bank, that, to the best of its 
knowledge and belief, such notes, drafts, or bills of 
exchange have been issued for one or more of the 
purposes mentioned in (a), above. 

(Regulations of Federal Reserve Board, Regulation A, 
Series of 1917, A, III.) 



member bank. 



tie 



Rediscount of Promissory 
Notes 

DEFINITION OF NOTE 

A promissory note, within the meaning of this 
regulation, is defined as an unconditional promise, 
in writing, signed by the maker, to pay, in the 
United States, at a fixed or determinable future 
time, a sum certain in dollars to order or to bearer. 

(Regulations of Federal Reserve Board, Regulation A, 
Series of 1917, A, IV.) 

ELIGIBLE CLASSES OF NOTES 

Statutory Provisions 



Commercial paper. 



Agricultural and 
commodity paper. 



Paper based on 
United States 
obligations. 



Eligible notes are defined in the laws as fol- 
lows: 

"Notes, drafts, and bills of exchange issued or 
drawn for agricultural, industrial, or commercial 
purposes, or the proceeds of which have been used, 
or are to be used, for such purposes, the Federal 
Reserve Board to have the right to determine or 
define the character of the paper thus eligible for 
discount, within the meaning of this Act. Nothing 
in this Act contained shall be construed to prohibit 
such notes, drafts, and bills of exchange, secured 
by staple agricultural products, or other goods, 
wares, or merchandise, from being eligible for such 
discount; [or] . . . notes, drafts, or bills . . . 
issued or drawn for the purpose of carrying or 



Rediscounts 



57 



trading in . . . bonds and notes of the Govern- 
ment of the United States." 

(Federal Reserve Act, Section 13.) 

"The Federal reserve banks shall be authorized, ^ P w r ar ba F V 1 l n c n t bo,ld, 
subject to the maturity limitations of the Federal Corporation. 
Reserve Act and to regulations of the Federal 
Reserve Board, to discount the direct obligations 
of member banks secured by . . . bonds of the 
[War Finance] Corporation and to rediscount eli- 
gible paper secured by such bonds and endorsed by 
a member bank." 

(War Finance Corporation Act, Section IS.) 

Regulations of Federal Reserved Board 

The Federal Reserve Board, exercising its statu- 
tory right to define the character of a note, draft, or 
bill of exchange eligible for rediscount at a Fed- 
eral reserve bank, has determined that : 

It must be a note, draft, or bill of exchange, the Commercial paper. 
proceeds of which have been used or are to be used 
in producing, purchasing, carrying, or marketing 
goods* in one or more of the steps of the process of 
production, manufacture, or distribution ; 

The paper may be secured by the pledge of goods Collateral notes, 
or collateral provided it is otherwise eligible. 

(Regulations of Federal Reserve Board, Regulation A, 
Series of 1917, A, II.) 

Opinions'and Rulings 

Federal reserve banks do not make loans di- Loans to indiyidnals. 
rectly to individuals, but rediscount the paper of 



* When used in this regulation the word "goods" shall be 
construed to include goods, wares, merchandise, or agricul- 
tural products, including live stock. 



58 



Commercial Banking Practice 



member banks, which include all national banks and 
such State banks as may have joined the Federal 
Reserve System. 

(Informal Ruling, Page 272, June, 1916, Bulletin.) 



Paper of waterworks 

company. 



Farmers' notes. 



Assignment of open 
accounts ineligible. 



Notes Based on Production and Distribution of Goods. 

The 90-day paper of a waterworks company, the 
proceeds of which have been or are to be used to 
provide funds for payroll, purchases of coal, etc., 
is eligible for rediscount by a Federal reserve bank 
if the paper is otherwise in conformity with the law 
and the provisions of the Board's regulations. 

(Informal Ruling, Page 527, July, 1917, Bulletin.) 

Farmers' notes, the proceeds of which are used 
for tilling farms or for draining land already in 
use as farm land, should be classified as agricultural 
paper, and are eligible for rediscount. 

(Informal Ruling, Page 743, August, 1918, Bulletin.) 

The assignment of an open account is not nego- 
tiable paper and is not eligible for rediscount by a 
Federal reserve bank under the terms of section 
13 of the Federal Reserve Act. 

(Opinion of Counsel, Page 227, May, 1916, Bulletin.) 



Discount of renewal Renewals differ, and banking judgment deter- 
mines the merits of each particular case. Self- 
liquidating paper, even though the transaction 
which gives rise to it does not liquidate itself within 
the 90-day maturity, might be discounted even 
though it appears to be renewal paper. Banks 
should not enter into an agreement for a renewal. 
Care should be exercised in examining such paper 
and the transactions which give rise to it, but me- 
chanical rules should not be allowed to take the 
place of discriminating banking judgment. 

(Informal Ruling, Page 74, June, 1915, Bulletin.) 



Rediscounts 59 

Secured Notes. 

Under section 13 of the Federal Reserve Act the ^/^J" 1 ^ by 
eligibility of a note for rediscount is determined by 
the use of the funds derived from the original nego- 
tiation of the note. The collateral security of the 
note may indicate its use, but the form of collateral 
is otherwise immaterial. In other words, a note 
might be secured by railroad stocks and bonds, but 
the proceeds might be used for an agricultural, 
industrial, or a commercial purpose, in which event 
the note would be eligible for rediscount, although 
it would not be if the proceeds were used to pur- 
chase or carry the railroad stocks and bonds. 

(Opinion of Counsel, Page 954, December, 1917, Bulletin.) 

Notes secured by collateral, the proceeds of Collateral notes for 

.... . •', , . -, -k commercial purposes. 

which have been used or are to be used tor commer- 
cial purposes, and which otherwise comply with the 
regulations, are eligible for rediscount. 

The fact that commercial paper has the addi- 
tional security of collateral in no way affects its 
eligibility for rediscount. 

(Informal Ruling, Page 268, September, 1915, Bulletin.) 

A note, even though secured by eligible paper, is EI ^ Ie secu " l y not 
not itself eligible for rediscount unless issued for an 
agricultural, commercial, or industrial purpose. 

(Informal Ruling, Page 690, September, 1917, Bulletin.) 

The note of a manufacturer secured by his bills Collateral of bills 
receivable is desirable paper, and should certainly 
not be debarred as a collateral trust note. 

(Informal Ruling, Page 127, July, 1915, Bulletin.) 

A note, draft, or bill of exchange drawn for com- Collateral of 
mercial purposes and otherwise eligible for redis- mort s a s e *- 
count under the provisions of section 13 of the 
Federal Reserve Act is not rendered ineligible 
merely because it is secured by a mortgage on real 
estate. 

(Opinion of Counsel, Page 458, June, 1917, Bulletin.) 



60 



Rediscount for 
insolvent bank 
when reopened. 



Notes secured by 
food products. 



Pig iron security. 



Authority. 



Commercial Banking Practice 

The Board upholds a Federal reserve bank in 
declining to give assurance to the receiver of an 
insolvent member bank that the Federal reserve 
bank will upon the reopening of the insolvent bank 
rediscount eligible paper freely, without requiring 
the indorsement of directors or other additional se- 
curity. Offerings should be considered upon their 
merits. 

(Informal Ruling, Page 66, February, 1916, Bulletin.) 

Paper secured by staple perishable food products 
such as butter, cheese, eggs, poultry, frozen fish, 
etc., carried for seasonable periods in cold storage 
on negotiable warehouse receipts, is eligible, if of- 
fered with the indorsement of a member bank at 
the usual rate for 90-day commercial paper. 

(Informal Ruling, Page SO, January, 1918, Bulletin.) 

The note of a furnace company secured by pig 
iron manufactured by the company on contract for 
delivery is eligible for rediscount. While this prin- 
ciple generally holds good, each case should be 
carefully scrutinized that the collateral may be 
readily marketable goods. 

(Informal Ruling, Page 127, July, 1915, Bulletin.) 

Notes Based on United States Obligations and War 
Finance Corporation Bonds. 

The statement of law that the definition of eli- 
gible paper shall not include notes, drafts, or bills 
of exchange drawn for the purpose of "carrying or 
trading in stocks, bonds, or other investment se- 
curities, except bonds and notes of the Government 
of the United States," is equivalent to an affirma- 
tive declaration that a Federal reserve bank may 
discount a note, draft, or bill of exchange indorsed 
by a member bank which is issued or drawn for the 
purpose of carrying or trading in bonds or notes of 
the United States. 

(Informal Ruling, Page 158, March, 1917, Bulletin.) 



Rediscounts 



61 



Conditions of 

eligibility. 



Maturity in relation 
to eligibility. 



Any member bank which has loaned money to 
any of its customers for the purpose of carrying or 
trading in bonds or notes of the United States may 
rediscount with its Federal reserve bank the bill 
or note of its customer, provided such bill or note 

(a) Has a maturity at the time of discount of 
not more than ninety days, exclusive of days 
of grace; and 

(b) Has the indorsement of the member bank. 
Such bill or note, however, need not necessarily 

be secured and need not be drawn for a commercial 
purpose other than for the purpose of carrying or 
trading in notes or bonds of the United States. 

(Informal Ruling, Page 158, March, 1917, Bulletin.) 

A member bank acting through another member 
bank may obtain the discount of its paper secured 
by Government bonds for a period as long as 90 
days, although a member bank acting alone may 
not tender its collateral note to the Federal reserve 
bank, which runs for more than 15 days. 

It may be proper in this connection to consider 
questions of fact ; but in case a country bank which 
has regular dealings with a large bank in a city 
sends its note secured by Government bonds to that 
bank, the Board would regard the note as eligible 
for rediscount by the city bank. 

(Informal Ruling, Page 86S, September, 1918, Bulletin.) 

If the proceeds of a note have been used or are to Notes of nonmember 
be used to carry or trade in United States obliga- 
tions, the note, if acquired in good faith, should be 
eligible for rediscount with the indorsement of the 
member bank, whether it is executed by a member 
or by a nonmember bank. 

(Informal Ruling, Page 743, August, 1918, Bulletin.) 



62 



Commercial Banking Practice 



Security paper. 



Notes for permanent, 
fixed, or speculative 
investments. 



Discount of renewal 
notes. 



Extension. 



INELIGIBLE CLASSES OF NOTES 

Statutory Provisions 

"Such definition [of paper eligible for redis- 
count] shall not include notes, drafts, or bills cov- 
ering merely investments or issued or drawn for the 
purpose of carrying or trading in stocks, bonds, or 
other investment securities, except bonds and notes 
of the United States." 

(Federal Reserve Act, Section IS.) 
Regulations ofithe^FederaliReserve Board 

The paper must not be a note, draft, or bill of 
exchange, the proceeds of which have been used or 
are to be used for permanent or fixed investments 
of any kind, such as land, buildings, or machinery. 

The paper must not be a note, draft, or bill of 
exchange, the proceeds of which have been used or 
are to be used for investments of a purely specula- 
tive character. 

(Regulations of Federal Reserve Board, Regulation A, 
Series of 1917, A, II.) 

Opinions and Rulings' 

Renewals and Extensions. 

Renewals differ, and banking judgment deter- 
mines the merits of each particular case. Those 
providing working capital or to finance fixed in- 
vestments are not eligible for rediscount. Banks 
should not enter into an agreement for a renewal. 

(Informal Ruling, Page 74, June, 1915, Bulletin.) 

A note or draft containing a provision for an 
extension of time should not be approved for gen- 
eral use by the Federal Reserve Board. 

(Opinion of Counsel, Page 870, September, 1918, Bulletin.) 



Rediscounts 



63 



Financial Paper. 

A note executed by Bank "A," and discounted Not« to replace 
by Bank "B," the proceeds of which were used to 
replace funds withdrawn by customers to purchase 
Liberty Bonds, is not eligible for rediscount by a 
Federal reserve bank, since the proceeds were not 
used for an agricultural, industrial, or commercial 
purpose, or for the purchase of notes or bonds of 
the United States. 

(Opinion of Counsel, Page 954, December, 1917, Bulletin.) 

"Notes, drafts, and bills of exchange which are Paper secured by 
secured by war savings stamps are ineligible for war "^f* «**»?«• 
rediscount with a Federal reserve bank." 

Counsel suggests that war savings stamps are 
not bonds or notes of the United States but in ef- 
fect only receipts for payment on account of non- 
negotiable evidences of indebtedness (war savings 
certificates). 

(Opinion of Counsel, Page 637, July, 1918, Bulletin.) 



Notes of acceptance 
house or broker. 



The note of an acceptance house or broker, se- 
cured by acceptances eligible for rediscount at a 
Federal reserve bank, is not eligible for redis- 
count. 

The note of the acceptance house or broker can 
not be said to have been used for an industrial, agri- 
cultural, or commercial purpose, since the business 
of such acceptance house or broker is not such as to 
come within any of these classifications. The fact 
that the note is secured by eligible paper is imma- 
terial if the proceeds are not used for one of the 
purposes named. 

(Informal Ruling, Page 108, February, 1918, Bulletin.) 

The note of a finance or credit company which is Nole « °f finance 
drawn either directly or indirectly to finance some com * hmt *- 
industrial or commercial concern in the transaction 
of its business is not eligible for rediscount, even 



64, 



Commercial Banking Practice 



Collateral 
trait notes. 



Collateral of bills 
reeeiyablt. 



Exchange and 
collection charges 
distinguished. 



Charges before and 
after maturity. 



though it may be secured by paper which is itself 
eligible for rediscount. 

(Informal Ruling, Page 197, March, 1918, Bulletin.) 

The Board holds that collateral trust notes of so- 
called finance companies should not be accepted by 
Federal reserve banks for rediscount. Such a 
transaction is not a commercial one. 

(Informal Ruling, Page 72, June, 1915, Bulletin.) 

The note of a manufacturer secured by his bills 
receivable is desirable paper, and should certainly 
not be debarred as a collateral trust note. When 
issued for the purpose of carrying collateral for a 
speculative purpose or collateral in the nature of 
stocks and bonds other than the securities of the 
United States, the note would not be eligible for 
rediscount. 

(Informal Ruling, Page 127, July, 1915, Bulletin.) 
Bills Payable -with Collection Charges. 

"A bill made payable with 'collection charges' 
is not a negotiable instrument, though the Nego- 
tiable Instruments Law provides that an instru- 
ment payable 'with exchange' does not lose its ne- 
gotiability." 

Counsel suggests that the amount of exchange is 
usually ascertainable in advance while collection 
charges are not so ascertainable. 

(Opinion of Counsel, Page 880, November, 1917, Bulletin.) 

"While a bill containing a provision for payment 
of the costs of collection and attorney's fees, if it is 
dishonored at maturity, is a valid negotiable instru- 
ment, a bill drawn for a fixed sum 'with collection 
charges' is not a negotiable instrument unless it is 
so drawn as to show that no collection charges are 
to be included unless the bill is dishonored at ma- 
turity." 

(Opinion of Counsel, Page 745, August, 1918, Bulletin.) 



Rediscounts 65 

EVIDENCE OF ELIGIBILITY AND RE- 
QUIREMENT OF STATEMENTS 

Regulations of the Federal Reserve Board 

A Federal reserve bank must be satisfied by ref- E ? i< !|; n " ol 
erence to the note or otherwise that it is eligible for e lgl * * 7# 
rediscount. Compliance of a note [with the re- 
quirements of eligibility] . . . may be evidenced 
by a statement of the borrower showing a reason- 
able excess of quick assets over current liabilities. 
The member bank shall certify in its application 
whether the note offered for rediscount has been 
discounted for a depositor or another member bank 
or whether it has been purchased from a nonde- 
positor. It must also certify whether a financial 
statement of the borrower is on file. 

Such financial statements must be on file with Financial statements, 
respect to all notes offered for rediscount which 
have been purchased from sources other than a de- 
positor or a member bank. With respect to any 
other note offered for rediscount, if no statement is 
on file, a Federal reserve bank shall use its discre- 
tion in taking the steps necessary to satisfy itself 
as to eligibility. It is authorized to waive the re- Waiver of statement, 
quirement of a statement with respect to any note 
discounted by a member bank for a depositor or 
another member bank : 

( 1 ) If it is secured by a warehouse, terminal, or 
other similar receipt covering goods in storage; 

(2) If the aggregate of obligations of the bor- 
rower rediscounted and offered for rediscount at 
the Federal reserve bank is less than a sum equal to 
10 per cent of the paid-in capital of the member 
bank and does not exceed $5,000. 

(Regulations of Federal Reserve Board, Regulation A, 
Scries of 1917, A. IV.) 



66 



Commercial Banking Practice 



Cotton-mill paper. 



Standing timber. 



Unmined minerals. 



Opinions and Hillings 

Banks are authorized to discount cotton-mill 
paper indorsed by member banks where general 
conditions are satisfactory and statement of cot- 
ton mill shows that plant is not mortgaged and that 
the deficiency between capital and plant account 
does not amount to more than $5 per spindle. 

(Informal Ruling, Page 73, June, 1915, Bulletin.) 

The Board does not regard it as safe policy for 
Federal reserve banks to treat timber standing 
upon tracts of land as quick assets, similar to manu- 
factured goods in the hands of the manufacturer or 
jobber. 

(Informal Ruling, Page 126, July, 1915, Bulletin.) 

Unmined minerals are not regarded as quick 
assets. 

(Informal Ruling, Page 126, July, 1915, Bulletin.) 



MATURITY OF NOTES ELIGIBLE 
FOR REDISCOUNT 

Statutory Provisions 



Commercial paper. 



Agricultural or live 
stock paper. 



"Notes, drafts, and bills admitted to discount un- 
der terms of this paragraph must have a maturity 
at the time of discount of not more than ninety 
days, exclusive of days of grace: Provided, that 
notes, drafts, and bills drawn or issued for agricul- 
tural purposes or based on live stock and having a 
maturity not exceeding six months, exclusive of 
days of grace, may be discounted in an amount to 
be limited to a percentage of the assets of the Fed- 
eral reserve bank, to be ascertained and fixed by 
the Federal Reserve Board." 

(Federal Reserve Act, Section IS.) 



Rediscount! 



67 



Regulations of Federal Reserve Board 

Any Federal reserve bank may discount for any Maturity of 90 dayi. 
of its member banks any note, draft, or bill of ex- 
change provided it has a maturity at the time of 
discount of not more than ninety days, exclusive of 
days of grace; but if drawn or issued for agricul- 
tural purposes or based on live stock, it may have 
a maturity at the time of discount of not more than 
six months, exclusive of days of grace. 

(Regulations of Federal Reserve Board, Regulation A, 
Series of 1917, A, I.) 



Maturity of six 
months. 



Opinions and Rulings 

A bill payable "on or before" a certain date is 
negotiable paper and, if otherwise in conformity 
with the provisions of law and of the Federal Re- 
serve Act, is eligible for discount by a Federal re- 
serve bank. 

(Informal Ruling, Page 394, August, 1916, Bulletin.) 

A demand note or bill is not eligible under the 
provisions of the Act, since it is not in terms pay- 
able within the prescribed ninety days, but may, at 
the option of the holder, not be presented for pay- 
ment until after that time. 

If the bill were altered so as to read "on or be- 
fore days from date, pay to the order of 

ourselves," etc., it would come within the terms of 
the law and would be eligible for rediscount. 

(Informal Ruling, Page 378, May, 1917, Bulletin.) 



'on demand, and if no de- 
," is eligible for 



A note made payable 
mand is made, then on - 
rediscount by a Federal reserve bank, provided 
that the date to be filled in is not more than 90 days 
from the date of discount, and provided further it 
conforms to the other provisions of law and the 
regulations of the Board. 

(Informal Ruling, Page 527, July, 1917, Bulletin.) 



Notes payable 
"on or before. 



Demand notes. 



Notes payable before 
certain date. 



68 
Extension of 



Direct loans and 

rediscounts 

distinguished. 



Ten per cent limit. 



Exception. 



Commercial Banking Practice 

A note or draft containing a provision for an ex- 
tension of time should not be approved for general 
use by the Federal Reserve Board. 

(Opinion of Counsel, Page 870, September, 1918, Bulletin.) 

A member bank acting through another member 
bank may obtain the discount of its paper secured 
by Government bonds for a period as long as 90 
days, although a member bank acting alone may 
not tender its collateral note to the Federal re- 
serve bank, which runs for more than 15 days. 

It may be proper in this connection to consider 
questions of fact — whether the transaction is in 
good faith or whether the two banks exchange 
courtesies merely for the purpose of having their 
notes discounted for 90 days instead of 15 days; 
but in case a country bank which has regular deal- 
ings with a large bank in a city sends its note se- 
cured by Government bonds to that bank, the 
Board would regard the note as eligible for redis- 
count by the city bank. 

(Informal Ruling, Page 863, September, 1918, Bulletin.) 

AMOUNT OF PAPER OF 

ONE INTEREST REDISCOUNTABLE 

FOR ONE MEMBER BANK 

Statutory Provisions 

"The aggregate of such notes, drafts, and bills 
bearing the signature or indorsement of any one 
borrower, whether a person, company, firm, or cor- 
poration, rediscounted for any one bank shall at no 
time exceed ten per centum of the unimpaired capi- 
tal and surplus of said bank; but this restriction 
shall not apply to the discount of bills of exchange 
drawn in good faith against actually existing 
values." 

(Federal Reserve Act, Section 13.) 



Rediscounts 69 

"No Federal reserve bank shall be permitted to R«tf«ooiiti 

J for member 

discount for any [member] State bank or trust state banki. 
company notes, drafts, or bills of exchange of any 
one borrower who is liable for borrowed money to 
such State bank or trust company in an amount 
greater than ten per centum of the capital and sur- 
plus of such State bank or trust company ; but the 
discount of bills of exchange drawn against actually 
existing value and the discount of commercial or 
business paper actually owned by the person nego- 
tiating the same shall not be considered as borrowed 
money within the meaning of this section. The 
Federal reserve bank, as a condition of the discount Conditions, 
of notes, drafts, and bills of exchange for such State 
bank or trust company, shall require a certificate or 
guaranty to the effect that the borrower is not liable 
to such bank in excess of the amount provided by 
this section, and will not be permitted to become 
liable in excess of this amount while such notes, 
drafts, or bills of exchange are under discount with 
the Federal reserve bank." 

(Federal Reserve Act, Section 9.) 



Re^ulations"of Federal Reserve^Board 

"The aggregate of notes, drafts, and bills bear- Ten per cent limit, 
ing the signature or indorsement of any one bor- 
rower, whether a person, company, firm, or cor- 
poration, rediscounted for any one member bank, 
shall at no time exceed ten per cent of the unim- 
paired capital and surplus of such bank; but this Exception, 
restriction shall not apply to the discount of bills 
of exchange drawn in good faith against actually 
existing values." 

(Regulations of Federal Reserve Board, Regulation A, 
Series of 1917, A, I.) 



70 



Commercial Banking Practice 



Opinions and Rulings 



Ten per cent limit. 



Paper of one maker 
or indorser. 



Not applicable to 
rediscounting bank. 



Paper of cotton 
broker. 



A Federal reserve bank is not permitted to re- 
discount the paper of a customer of a member State 
bank if the customer is indebted to the member bank 
in an amount in excess of ten per cent of the capital 
and surplus of the member bank. 

(Informal Ruling, Page 863, September, 1918, Bulletin.) 

If any particular paper presented by a member 
bank to a Federal reserve bank for rediscount, 
singly or added to the paper of the same makers or 
indorsers which the Federal reserve bank has al- 
ready rediscounted for said member bank, amounts 
to a total of more than ten per cept of the unim- 
paired capital and surplus of that bank, the Fed- 
eral reserve bank has no authority for such re- 
discount. 

(Informal Ruling, Page 224, May, 1916, Bulletin.) 

In the opinion of the Board the limitations con- 
tained in section 18 of the Federal Reserve Act on 
the rediscount of paper bearing the signature or 
indorsement of any one borrower should not be held 
to refer to the indorsement of a nonmember bank 
on paper rediscounted with a member bank. 

(Informal Ruling, Page 520, June, 1918, Bulletin.) 

A cotton broker who is a depositor of a bank 
finances cotton for various mills by giving to the 
bank his note secured by warehouse receipts of the 
mills indorsed in blank, for cotton stored in his 
name and properly insured, but sold to the mill for 
a specific amount to be paid at a specific time, as 
per sales note attached. The question arises 
whether such loans taken from one broker in ex- 
cess of ten per cent of the capital and surplus of 
the bank would be an excess loan under the Federal 
Reserve Act, if the financing for each individual 



Rediscounts 71 

mill and the accepted sales note held of said mill 
were not in excess of said ten per cent. 

It is held that the transaction in form is merely a 
discount of single name negotiable paper secured 
by so many bales of cotton. Such notes would 
clearly come within the provisions of section 5200 
of the Revised Statutes.* 

The language of section 13 of the Federal Re- 
serve Act is still more comprehensive and no Fed- 
eral reserve bank could rediscount such notes bear- 
ing the name of one broker for an aggregate 
amount in excess of ten per cent of the capital and 
surplus of the member bank. 

(Informal Ruling, Page 113, March, 1916, Bulletin.) 

Relation of Section 5200, Revised Statutes,* to the Ten 
Per Gent Limit. 

While a member bank may acquire commercial ^""""pLer. 
or business paper from the same person in excess 
of ten per cent of its unimpaired capital and sur- 
plus, its Federal reserve bank can not rediscount 
such paper bearing the signature or indorsement of 
the same person in excess of that amount. 

Section 13, Federal Reserve Act, does not amend 
section 5200, United States Revised Statutes. 

(Opinion of Counsel, Page 274, June, 1916, Bulletin.) 

A note or bill rediscounted in good faith by a Rediscounted paptr 
member bank, which is no longer owned or held by "ectioTwoo/ 
the bank, need not be included as a liability of the 
maker to the bank within the meaning of section 
5200, Revised Statutes. Notes or bills rediscounted 
under an agreement to repurchase, or which are 
merely credited to the account of the bank offering 
them for rediscount, are subject to the limitations 
of section 5200. 

(Opinion of Counsel, Page 867, September, 1918, Bulletin.) 
* For section 5200 see page 43, above. 



72 



Commercial Banking Practice 



Rediscount by State 
member banks. 



Where a State bank, which is a member of the 
Federal Reserve System, has loaned to one of its 
customers an amount equal to 30 per cent of its 
capital and surplus, and has rediscounted two- 
thirds of this amount with a correspondent bank, 
the remaining one-third is eligible for rediscount 
with its Federal reserve bank. 

(Opinion of Counsel, Page 638, July, 1918, Bulletin.) 



E~ 



GGREGATE AMOUNT REDISCOUNT- 
ABLE FOR ONE BANK 



Not limited by 
section 5202. 



Subject to regulations 
of Federal Reserve 
Board. 



Statutory Provisions 

"No national banking association shall at any 
time be indebted, or in any way liable, to an amount 
exceeding the amount of its capital stock at such 
time actually paid in and remaining undiminished 
by losses or otherwise, except on account of . . . 
liabilities incurred under the provisions of the Fed- 
eral Reserve Act." 

(Section 5202, Revised Statutes, as amended by Section 13, 
Federal Reserve Act.) 

"The discount and rediscount and the purchase 
and sale by any Federal reserve bank of any bills 
receivable and of domestic and foreign bills of ex- 
change, and of acceptances authorized by this Act, 
shall be subject to such restrictions, limitations, and 
regulations as may be imposed by the Federal Re- 
serve Board." 

(Federal Reserve Act, Section 13.) 



Not limited by law. 



Opinions and Rulings 

The law places no limitation upon the amount of 
commercial paper which a member bank may re- 
discount with a Federal reserve bank, but leaves 



Rediscounts 73 

this to the judgment of the officers of the Federal 
reserve bank. 

(Informal Ruling, Page 457, September, 1916, Bulletin.) 

Under section 5202, Revised Statutes, a national Discretion of Federal 
bank may not borrow as bills payable in excess of reserve 
its capital stock. Under the Federal Reserve Act 
it may rediscount actual items of paper in its pos- 
session to any amount in the discretion of the Fed- 
eral reserve bank of its district. 

(Informal Ruling, Page 112, March, 1916, Bulletin.) 

INDORSEMENT OF MEMBER BANKS 
Statutory Provisions 

"Upon the indorsement of any of its member indorsement, 
banks, which shall be deemed a waiver of demand, 
notice, and protest by such bank as to its own in- 
dorsement exclusively, any Federal reserve bank 
may discount notes, drafts, and bills of exchange." 

(Federal Reserve Act, Section 13.) 

Opinions and Rulings 



A simple written indorsement will be regarded indorsement 
as satisfactory and as coming within the terms of IS waiver * 
the law. 

(Informal Ruling, Page 524, October, 1916, Bulletin.) 

If a note is otherwise eligible for rediscount, the without recourse, 
fact that it bears a "without recourse" indorsement 
of a nonmember bank will not affect its eligibility. 

(Opinion of Counsel, Page 745, August, 1918, Bulletin.) 

REDISCOUNT FOR NONMEMBER 
BANKS 

Statutory Provisions 

"No member bank shall act as the medium or Procuring rediscounts 
agent of a nonmember bank in applying for or re- or nonmeml>er5 * 



74 



Commercial Banking Practice 



ceiving discounts from a Federal reserve bank un- 
der the provisions of this Act, except by permission 
of the Federal Reserve Board." 

(Federal Reserve Act, Section 19.) 



Rediscount of paper 
acquired from 
nonmember banks. 



Rediscount of 
indorsed by 
nonmember bank. 



paper 



Opinions and Rulings 

Assuming that the paper offered by a member 
bank for rediscount is eligible under the regulations 
prescribed by the Board, it would be necessary in 
each case for the officers of the Federal reserve 
bank to determine whether or not the proceeds of 
such discount are to be used for the purpose of mak- 
ing a loan to a nonmember bank. If the money 
thus borrowed is to be re-lent to a nonmember 
bank, rediscount should not be accepted without 
the permission of the Federal Reserve Board. If, 
on the other hand, a member bank had in good 
faith acquired from a nonmember bank by redis- 
count notes which are eligible under the regulations 
of the Board for rediscount with the Federal re- 
serve bank, and such notes were held as a part of 
the assets of the member bank, there would seem to 
be no objection to the Federal reserve bank's ac- 
cepting such rediscounts, provided the officers are 
satisfied that the transaction is a bona fide trans- 
action and that the member bank did not extend 
accommodation to the nonmember bank with a 
view to rediscounting notes so acquired with the 
Federal reserve bank. 

This is one of the cases which must be left very 
largely to the judgment and discretion of the Fed- 
eral reserve bank officers; and a determination 
must be reached by them on the facts of the case. 

(Informal Ruling, Page 213, August, 1915, Bulletin.) 

— ^^jJS 

In the opinion of the Board the limitations con- 
tained in section 13 of the Federal Reserve Act on 
the rediscount of paper bearing the signature or in- 



Rediscounts 75 

dorsement of any one borrower should not be held 
to refer to the indorsement of a nonmember bank 
on paper rediscounted with a member bank. 

It is true that in such ease the nonmember bank 
is contingently liable if the paper is not paid at ma- 
turity, but the Board is inclined to the view that 
this language refers to paper bearing the signature 
or indorsement of borrowers or customers of the 
member bank and not to the indorsement of other 
banks. A nonmember bank could not, of course, 
obtain indirect accommodation from the Federal 
reserve bank through the medium or agency of a 
member bank except . with the permission of the 
Federal Reserve Board, but if a member bank had 
acquired eligible paper in due course by rediscount 
from a nonmember bank the member bank should 
hardly be precluded from rediscounting this paper 
with the Federal reserve bank because it bears the 
indorsement of the nonmember bank. 

(Informal Ruling, Page 520, June, 1918, Bulletin.) 



76 



Rediscount of Drafts and Trade 
Acceptances 

DEFINITION OF DRAFT 



Draft or bill 
of exchange. 



Regulations of Federal Reserve Board 

A draft or bill of exchange, within the meaning 
of this regulation, is defined as an unconditional 
order in writing, addressed by one person to an- 
other, other than a banker . . . signed by the per- 
son giving it, requiring the person to whom it is 
addressed to pay, in the United States, at a fixed or 
determinable future time, a sum certain in dollars 
to the order of a specified person. 

(Regulations of Federal Reserve Board, Regulation A, 
Series of 1917, A, V.) 



Extension 
of time. 



Presentment 
of bills for 
acceptance. 



Acceptor not 
affected by 



Opinions and Rulings 

A note or draft containing a provision for an ex- 
tension of time should not be approved for general 
use by the Federal Reserve Board. 

(Opinion of Counsel, Page 870, September, 1918, Bulletin.) 

The drawer and indorser of a bill of exchange 
made payable on a date specified in the bill are not 
discharged by a failure to present for acceptance, 
unless the bill expressly provides that it must be 
presented for that purpose, or unless it is payable 
elsewhere than, at the residence or place of busi- 
ness of the drawee. 

(Opinion of Counsel, Page 608, November, 1916, Bulletin.) 

The acceptor of a bill of exchange is the prin- 
cipal debtor. The law requires that notice of de- 
mand and protest be given to parties secondarily 



Rediscounts 77 

liable in case of dishonor. This right to receive 
notice is a personal one which may be waived by 
the parties entitled thereto, that is, the drawer and 
indorser; but such waiver has no effect on the ac- 
ceptor or principal debtor. 

(Opinion of Counsel, Page 277, September, 1915, Bulletin.) 

Negotiability. 

The negotiability of a bill of exchange is not af- Effect of 
fected by provisions which waive demand, notice, waiTer »- 
and protest; which waive homestead exemption 
rights ; and which provide for the costs of collection 
and attorney's fees. 

(Opinion of Counsel, Page 226, May, 1916, Bulletin.) 

A provision in a draft or bill of exchange that it D f aft f pay** 1 * 
is payable "with interest at the rate of — per cent WI 
per annum after maturity, if payment is delayed/' 
does not affect the negotiability of the instrument. 

(Opinion of Counsel, Page 200, March, 1917, Bulletin.) 

A draft made "payable on arrival of car" is non- Drafts payable 
negotiable, not being payable at a determinable on condltion - 
future time. 

(Opinion of Counsel, Page 219, August, 1915, Bulletin.) 

"A bill made payable with 'collection charges' is Exchange and 
not a negotiable instrument, though the Negotiable charges!" 
Instruments Law provides that an instrument pay- 
able 'with exchange' does not lose its negotiability." 

Counsel suggests that the amount of exchange is 
usually ascertainable in advance while collection 
charges are not so ascertainable. 

(Opinion of Counsel, Page 880, November, 1918, Bulletin.) 

While a bill containing a provision for payment ^7 f e t * r b * f a °i e ril 
of the costs of collection and attorney's fees, if it is 
dishonored at maturity, is a valid negotiable instru- 
ment, a bill drawn for a fixed sum "with collection 
charges" is not a negotiable instrument unless it 



78 



Commercial Banking Practic 



Drafts payable 

to order of drawee. 



is so drawn as to show that no collection charges are 
to be included unless the bill is dishonored at 
maturity. 

(Opinion of Counsel, Page 745, August, 1918, Bulletin.) 

A bill made payable to the order of the drawee is 
not negotiable until the drawee as payee has in- 
dorsed it. When it has been accepted and indorsed 
by the drawee it is a valid negotiable instrument in 
the hands of a third party, and the drawer is not 
released, since the terms of his order have been 
specifically complied with. 

(Opinion of Counsel, Page 110, February, 1918, Bulletin.) 



DEFINITION OF TRADE ACCEPTANCE 



Trade acceptance. 



Acceptance 
by drawee. 



Place of payment 
of acceptance. 



Discount for 
payment at 
maturity. 



Regulations of Federal Reserve Board 

A trade acceptance is defined as a draft or bill of 
exchange drawn by the seller on the purchaser of 
goods sold, and accepted by such purchaser. 

(Regulations of Federal Reserve Board, Regulation A, 
Series of 1917, A, V.) 

Opinions and Rulings 

A draft to be eligible as a trade acceptance must 
be accepted by the drawee and not by anyone else. 

(Informal Ruling, Page 112, March, 1916, Bulletin.) 

An acceptance to pay at a particular place differ- 
ent from the residence of the acceptor is a general 
acceptance, unless it expressly states that the bill is 
to be paid there and not elsewhere, and does not 
render the bill nonnegotiable. 

(Opinion of Counsel, Page 289, April, 1917, Bulletin.) 

A trade acceptance which consists of an order 
to pay a certain amount, which is the amount of the 
debt minus a discount for prompt payment at ma- 



Rediscounts 79 

turity, or, if not paid at maturity, to pay a greater 
amount, which is the amount of the debt without 
any discount, is an order to pay a sum certain and 
is negotiable. 

(Opinion of Counsel, Page 200, March, 1918, Bulletin.) 



Discount for 
prepayment. 



A trade acceptance providing for a fixed dis- 
count, if paid at a certain time before maturity, 
should not be approved for general use by the Fed- 
eral Reserve Board. 

(Opinion of Counsel, Page 871, September, 1918, Bulletin.) 

On the basis of the facts submitted in this case, it f c r c e | p * an s ^ ^ a e s * t d s on 
is held that a 90-day sight draft drawn by a firm in 
Calcutta on a company in Boston and accepted by 
that firm, covering a transaction involving the 
transportation of merchandise from Calcutta to 
Honolulu, is a trade acceptance rather than a 
banker's acceptance. 

(Informal Ruling, Page 404, December, 1915, Bulletin.) 

ELIGIBLE DRAFTS AND TRADE 
ACCEPTANCES 

Statutory Provisions 

Eligible paper is defined in the laws as follows: 
"Notes, drafts, and bills of exchange issued or Commercial paper, 
drawn for agricultural, industrial, or commercial 
purposes, or the proceeds of which have been used, 
or are to be used, for such purposes, the Federal 
Reserve Board to have the right to determine or de- 
fine the character of the paper thus eligible for dis- 
count, within the meaning of this Act. Nothing in 
this Act contained shall be construed to prohibit Agricultural and 
such notes, drafts, and bills of exchange, secured by commodit y P»P er - 
staple agricultural products, or other goods, wares, 
or merchandise from being eligible for such dis- 
count; [or] . . '. notes, drafts, or bills . . . issued 



80 



Commercial Banking Practice 



Paper based on 
United States 
obligations. 



Paper based on 
bonds of War 
Finance Corporation. 



or drawn for the purpose of carrying or trading in 
. . . bonds and notes of the Government of the 
United States." 

(Federal Reserve Act, Section 13.) 

"The Federal reserve banks shall be authorized, 
subject to the maturity limitations of the Federal 
Reserve Act and to regulations of the Federal Re- 
serve Board ... to rediscount eligible paper 
secured by . . . bonds [of the War Finance Cor- 
poration] and indorsed by a member bank." 

(War Finance Corporation Act, Section 13.) 



Conditions of 
eligibility. 



Commercial 
origin. 



Herniations of Federal Reserve Board 

The Federal Reserve Board, exercising its statu- 
tory right to define the character of a note, draft, or 
bill of exchange eligible for rediscount at a Federal 
reserve bank, has determined that : 

It must be a note, draft, or bill of exchange, the 
proceeds of which have been used or are to be used 
in producing, purchasing, carrying, or marketing 
goods* in one or more of the steps of the process of 
production, manufacture, or distribution; 

It may be secured by the pledge of goods or 
collateral, provided it is otherwise eligible. 

(Regulations of Federal Reserve Board, Regulation A, 
Series of 1917, A, II.) 



Based on retail 
transactions. 



Opinions and Rnlin^s 

A bill of exchange drawn by the seller of goods 
and accepted by the purchaser of those goods is a 
trade acceptance, regardless of whether or not the 
purchaser intends to resell the goods or to use them 



* When used in this regulation the word "goods" shall be 
construed to include goods, wares, merchandise, or agricultural 
products, including live stock. 



It it DISCOUNTS 81 

for his own purpose. Therefore, a retail dealer 
may finance the sale of his goods to a retail cus- 
tomer by means of the trade acceptance. 

(Informal Ruling, Page 30, January, 1918, Bulletin.) 

An acceptance drawn by a gas producing com- J ased on / ale and 
pany on a gas distributing company and accepted 
by the latter in payment for gas sold and delivered 
is a trade acceptance, eligible for rediscount by a 
Federal reserve bank. 

(Informal Ruling, Page 435, May, 1918, Bulletin.) 

Regarding the use of trade acceptances in con- Based ° n ins f aI1 - 
nection with the sale of coffee mills, etc., on an in- 
stallment plan, if the purchaser is willing to accept 
a draft in advance of the delivery of the goods there 
would seem to be no reason why such an acceptance 
should not be treated on the same basis as a bill 
drawn and accepted after delivery of such goods. 

(Informal Ruling, Page 437, May, 1918, Bulletin.) 

Drafts drawn for the purchase price of electrical ? as t aH a ° t ° n Iectrical 
goods, which include the cost of installation, may 
be treated as trade acceptances when such drafts 
are accepted by the purchaser. 

(Informal Ruling, Page 310, April, 1918, Bulletin.) 

A draft drawn by a lumber corporation upon a Acceptances of 

i ,. i • i • . i i t» ,i sales corporations. 

sales corporation which it and a number ot other 
lumber concerns have organized will, when ac- 
cepted, become a trade acceptance, even though the 
selling corporation is a stockholder of the sales cor- 
poration, provided the latter is organized in good 
faith and not merely to act as an agent for the pur- 
pose of evading the law. 

(Opinion of Counsel, Page 33, January, 1918, Bulletin.) 

A bill drawn by a retail dealer on his retail cus- Acceptances in 
tomer to finance the sale of goods to that customer pe n Accounts, 
is a trade acceptance within the meaning of the 
Board's regulations, even though it is drawn after 



82 



Commercial Banking Practice 



the purchaser has failed to remit promptly on an 
open account. 

The Board is of the opinion, however, that the 
attempt to use a trade acceptance in this manner as 
a means of liquidating an otherwise slow account 
would involve considerable danger to the primary 
purposes of the trade acceptance movement and 
would subordinate the trade acceptance to the open 
account by suggesting it as a last resort for bad 
debts. 

While, therefore, trade acceptances of this char- 
acter should probably be considered eligible as a 
matter of law, nevertheless member banks and Fed- 
eral reserve banks should be encouraged to discrim- 
inate against them as far as possible. 

(Informal Ruling, Page 30, January, 1918, Bulletin.) 



Acceptances based The Federal Reserve Board may properly rule 

that a draft or bill of exchange drawn by the seller 
on the purchaser of advertising space and accepted 
by such purchaser is a trade acceptance. 

(Opinion of Counsel, Page 116, February, 1917, Bulletin.) 



Conditions. 



A draft or bill of exchange drawn by a publisher 
or other advertising agency on the purchaser of ad- 
vertising space, and accepted by such purchaser, 
shall be considered a trade acceptance provided the 
advertisement on which the draft or bill is based is 
for the purpose of promoting or facilitating the 
production, manufacture, distribution, or sale of 
goods, whether merchandise or agricultural prod- 
ucts, including live stock, and provided, further, 
that such advertisement is not illegal and is not for 
the purpose of promoting or facilitating any trans- 
action which is prohibited by the laws of the state 
in which it is to be consummated. 

(Informal Ruling, Page 114, February, 1917, Bulletin.) 



Rediscounts 83 

Acceptances Based on Foreign Transactions. 

The fact that importation or exportation is in- Ba8ed °" im P° rt 
volved does not exclude the character of a trade ac- 
ceptance, and trade acceptances originating through 
importation from foreign countries, which are in- 
dorsed by banks or bankers, may be taken within 
the range of the discount rates for bankers' ac- 
ceptances. 

(Informal Ruling, Page 168, April, 1916, Bulletin.) 

Bills drawn for the purpose of providing funds ^^r*™ 
for the purchase and export of cross-ties and lum- 
ber to Cuba are eligible for rediscount if properly 
indorsed and otherwise conforming to the regula- 
tions of the Federal Reserve Board. 

(Informal Ruling, Page 268, September, 1915, Bulletin.) 

INELIGIBLE DRAFTS AND TRADE 
ACCEPTANCES 

Statutory Provisions 

"Such definition [of paper eligible for rediscount] Security paper, 
shall not include notes, drafts, or bills covering 
merely investments or issued or drawn for the pur- 
pose of carrying or trading in stocks, bonds, or 
other investment securities, except bonds and notes 
of the United States." 

(Federal Reserve Act, Section IS.) 

Regulations of the Federal Reserve Board 

The paper must not be a note, draft, or bill of Notes for 
exchange, the proceeds of which have been used or p^manent, fixed, 

tip n i • or speculative 

are to be used tor permanent or fixed investments investments, 
of any kind, such as land, buildings, or machinery. 
The paper must not be a note, draft, or bill of 
exchange, the proceeds of which have been used or 
are to be used for investments of a purely specula- 
tive character. 

(Regulations of Federal Reserve Board, Regulation A, 
Series of 1917, A, II.) 



84 



Commercial Banking Practice 



Acceptances 
based on future 
purchases. 



Drafts to finance 
capital requirements. 



Drafts in payment 
of insurance 
premiums. 



Character of 
evidence. 



Opinions and Rulings 

A bill, in order to be a trade acceptance, must 
arise out of the purchase of goods, and unless that 
purchase is either consummated or actually con- 
tracted for at the time the bill is drawn, it is doubt- 
ful whether it can properly be said that the obliga- 
tion arises out of the purchase of goods. 

(Informal Ruling, Page 378, May, 1917, Bulletin.) 

The Board's conception of the trade acceptance 
is that it is an instrument which carries upon its 
face the evidence of the commercial character of the 
transaction which gave it birth. The finance paper 

of the Corporation issued against drafts 

drawn by it on dealers and placed in trust to secure 
such paper issued by it in the shape of notes or 
certificates gives no indication whatever as to the 
nature of the security, which may or may not be 
eligible paper. 

It appears to the Board that the Corpora- 
tion by issuing notes of this character is really rais- 
ing money for capital requirements for similar 
transactions in the future, and that the whole plan 
is in essence a finance operation rather than a 
commercial transaction. 

(Informal Ruling, Page 109, February, 1918, Bulletin.) 

A draft drawn by a casualty company against a 
policyholder for premiums could hardly be said to 
be a draft by the seller on the purchaser of goods 
sold and would not, in the opinion of the Board, 
come within the Board's present definition of a 
trade acceptance. 

(Informal Ruling, Page 309, April, 1918, Bulletin.) 

EVIDENCE OF ELIGIBILITY 

Regulations of Federal Reserve Board 

A Federal reserve bank shall take such steps as 
it deems necessary to satisfy itself as to the eligibil- 



Rediscounts 85 

ity of the draft or bill offered for rediscount, unless 
it presents prima facie evidence thereof or bears 
a stamp or certificate affixed by the acceptor or 
drawer showing that it is a trade acceptance. 

(Regulations of Federal Reserve Board, Regulation A, 
Series of 1917, A, V.) 

Opinions and Rulings 

The fact that a land company has stamped a bill AccTtlTcT'^has 
a trade acceptance and has signed such statement no value, 
as "acceptor" does not in itself make it a trade ac- 
ceptance. The bill was accepted by the bank and 
not by the land company and is therefore not eligi- 
ble for purchase as a trade acceptance under the 
regulation which requires a bill to be accepted by 
the drawee. 

(Informal Ruling, Page 112, March, 1916, Bulletin.) 

MATURITY 

Statutory! Provisions 

"Notes, drafts, and bills admitted to discount Commercial paper, 
under terms of this paragraph must have a matur- 
ity at the time of discount of not more than ninety 
days, exclusive of days of grace : Provided, that Agricultural or live 
notes, drafts, and bills drawn or issued for agri- stoc paper * 
cultural purposes or based on live stock and hav- 
ing a maturity not exceeding six months, exclusive 
of days of grace, may be discounted in an amount to 
be limited to a percentage of the assets of the Fed- 
eral reserve bank, to be ascertained and fixed by the 
Federal Reserve Board." 

(Federal Reserve Act, Section 13.) 

Regulations of Federal Reserve Board 

The draft or trade acceptance must have a "ma- Maturity of 
turity at the time of discount of not more than mnety ays * 



86 



Commercial Banking Practice 



Maturity of 
six months. 



ninety days, exclusive of days of grace; but if 
drawn or issued for agricultural purposes or based 
on live stock, it may have a maturity at the time of 
discount of not more than six months, exclusive 
of days of grace." 

(Regulations of Federal Reserve Board, Regulation A, 
Series of 1917, A, I.) 



Opinions and Rulings 



Drafts payable 
on condition. 



Drafts payable 
"on or before" 
certain date. 



Demand drafts. 



Extension. 



A draft made "payable on arrival of car" is non- 
negotiable, not being payable at a determinable 
future time, and is therefore ineligible for redis- 
count by a Federal reserve bank. 

(Opinion of Counsel, Page 219, August, 1915, Bulletin.) 

Drafts payable "ninety days from date or before 
on five days after demand (i.e., on five days' notice) 
by the holder hereof" are negotiable and eligible for 
discount with a Federal reserve bank. 

(Opinion of Counsel, Page 291, April, 1917, Bulletin.) 

A demand note or bill is not eligible under the 
provisions of the Act, since it is not in terms pay- 
able within the prescribed ninety days, but, at the 
option of the holder, may not be presented for pay- 
ment until after that time. 

If the bill were altered so as to read "on or before 

days from date, pay to the order of ourselves," 

etc., it would come within the terms of the law and 
would be eligible for rediscount. 

(Informal Ruling, Page 378, May, 1917, Bulletin.) 

"A note or draft containing a provision for an 
extension of time should not be approved for gen- 
eral use by the Federal Reserve Board." 

(Opinion of Counsel, Page 870, September, 1918, Bulletin.) 



Rediscounts 

AMOUNT OF PAPER OF ONE INTEREST 

REDISCOUNTABLE FOR ONE 

MEMBER BANK 

Statutory Provisions 

"The aggregate of such notes, drafts, and bills Ten per cent 
bearing the signature or indorsement of any one hm,t 
borrower, whether a person, company, firm, or cor- 
poration, rediscounted for any one bank shall at 
no time exceed ten per centum of the unimpaired 
capital and surplus of said bank; but this restric- 
tion shall not apply to the discount of bills of ex- Exception, 
change drawn in good faith against actually exist- 
ing values." 

(Federal Reserve Act, Section 13.) 

Regulations of Federal Reserve Roard 

"The aggregate of notes, drafts, and bills bear- Ten per cent 
ing the signature or indorsement of any one bor- 
rower, whether a person, company, firm, or corpora- 
tion, rediscounted for any one member bank, shall 
at no time exceed ten per cent of the unimpaired 
capital and surplus of such bank; but this restric- 
tion shall not apply to the discount of bills of ex- Exception, 
change drawn in good faith against actually exist- 
ing values." 

(Regulations of Federal Reserve Board, Regulation A, 
Series of 1917, A, I.) 

Opinions and Rulings 

What Constitutes "Actually Existing Values." 

A bill of exchange discounted before acceptance Drafts discounted 
may be said to be drawn against actually existing before acce P tance - 
values, within the meaning of section 13 of the 
Federal Reserve Act, when and on lxr when it is 



88 



Commercial Banking Practice 



Trade acceptances. 



Trade acceptances 
for long standing 
open accounts. 



Evidence of 
"actually existing 
value." 



Qualified 
acceptances. 



accompanied by shipping documents, warehouse re- 
ceipts, or other papers securing title to the goods 
sold. 

An accepted bill of exchange, unaccompanied by 
shipping documents or other such papers, may be 
considered as drawn against actually existing 
values if drawn against the drawee at the time of, 
or within a reasonable time after, the shipment or 
delivery of the goods sold. In this latter case there 
must be reasonable grounds to believe that the 
goods are in existence in the hands of the drawee 
either in their original form or in the shape of the 
proceeds of their sale. 

(Opinion of Counsel, Page 195, March, 1917, Bulletin.) 

A bill drawn for a balance due on open account 
of long standing, which is accepted by the debtor, 
might constitute a trade acceptance, but in order 
for it to be excepted from the limitations imposed 
by section 13 of the Federal Reserve Act as a bill of 
exchange drawn against actually existing value, it 
must have been drawn contemporaneously with, or 
within such a reasonable time after, the shipment of 
the goods as to justify the assumption that the 
goods are in the hands of the drawee in their original 
form or in the form of proceeds of sale. 

As evidence of this fact, Federal reserve banks 
might reasonably require such trade acceptances as 
are offered as "bills of exchange drawn against 
actually existing value" to show the date of invoice, 
so that it may be determined whether or not the ac- 
count is one of long standing. 

(Informal Ruling, Page 287, April, 1917, Bulletin.) 

A bill of exchange drawn payable "at sight" and 
accepted payable in three months is a qualified or 
conditional acceptance, and the maker and prior 
indorsers are released. The instrument in effect 
becomes the promissory note of the acceptor, and 



Rediscounts 89 

would not come within the exception to section 5200 
[or section 13] as a "bill of exchange" drawn in 
good faith against actually existing value. 

(Opinion of Counsel, Page 463, September, 1916, Bulletin.) 

For additional opinions and rulings under this 
heading, but relating also to promissory notes, see 
pages 68-72, above. 

AGGREGATE AMOUNT REDISCOUNT- 
ABLE FOR ONE BANK 

See "Rediscount of Promissory Notes," pages 
72-73, above. 

INDORSEMENT OF MEMBER BANKS 

See "Rediscount of Promissory Notes," page 
73, above. 

REDISCOUNTS FOR NONMEMBER 
BANKS 

See "Rediscount of Promissory Notes," pages 
73-75, above. 



90 



Rediscount of Six Months' 
Agricultural Paper 



DEFINITION 



Live stock 
paper included. 



Live stock. 



Notes of cattle 
dealers. 



Notes of imple- 
ment dealers. 



Agricultural 
products or 
implements. 



Herniations of Federal Reserve Board 

Six months' agricultural paper, within the mean- 
ing of this regulation, is defined as a note, draft, 
bill of exchange, or trade acceptance drawn or is- 
sued for agricultural purposes, or based on live 
stock; that is, a note, draft, bill of exchange, or 
trade acceptance, the proceeds of which have been 
used, or are to be used, for agricultural purposes, 
including the breeding, raising, fattening, or mar- 
keting of live stock, and which has a maturity at 
the time of discount of not more than six months, 
exclusive of days of grace. 

(Regulations of Federal Reserve Board, Regulation A, 
Series of 1917, A, VI.) 

Opinions and Rulings 

The term "live stock" is held to include not only 
beef cattle, but also horses and mules. 

(Informal Ruling, Page 72, June, 1915, Bulletin.) 

Notes made by mule and cattle dealers are mer- 
cantile rather than agricultural paper. 

(Informal Ruling, Page 212, August, 1915, Bulletin.) 

A note made by a dealer in agricultural imple- 
ments is not agricultural paper. 

(Informal Ruling, Page 212, August, 1915, Bulletin.) 

The purchase or sale of an agricultural product, 
or of implements or other commodities used in 
agriculture, constitutes a commercial transaction. 



Rediscounts 91 

Where the proceeds of a note made by a merchant 
are used to purchase millet seed to be later retailed 
or sold, such a note can not be treated as one given 
for an agricultural purpose and can not be dis- 
counted by a Federal reserve bank if it has a matur- 
ity at time of discount of more than 90 days. 

(Opinion of Counsel, Page 526, October, 1916, Bulletin.) 

The bill or note of a packing company, the pro- Not f? or bi,Is of 
ceeds of which are used for the purchase of live pac mg company * 
stock which is slaughtered upon purchase, is not 
"based on live stock" within the meaning of sec- 
tion 13, and is, therefore, not eligible for rediscount 
if it has a maturity in excess of 90 days. 

(Opinion of Counsel, Page 616, August, 1917, Bulletin.) 

ELIGIBLE AGRICULTURAL PAPER 

Statutory Provisions 

"Notes, drafts, and bills drawn or issued for Agricultural and 
agricultural purposes or based on live stock and 
having a maturity not exceeding six months, ex- 
clusive of days of grace, may be discounted in an 
amount to be limited to a percentage of the assets 
of the Federal reserve bank, to be ascertained and 
fixed by the Federal Reserve Board." 

(Federal Reserve Act, Section 13.) 

Regulations of Federal Reserve Board 

To be eligible for rediscount six months' agricul- Conditions of 
tural paper, whether a note, draft, bill of exchange, eIl s ibll,t J r - 
or trade acceptance, must comply with the respec- 
tive sections of this regulation* which would apply 

* For conditions of eligibility of promissory notes, see pages 
56-61, above. For conditions of eligibility of drafts and trade 
acceptances, see pages 79-83, above. 



Commercial Banking Practice 

to it if its maturity were 90 days or less. 

(Regulations of Federal Reserve Board, Regulation A, 
Series of 1917, A, VI.) 

Opinions and Rulings 



Notes for 
fertilizer. 



Cattle mortgages. 



Chattel mortgages 
unnecessary. 



Notes for 
dairy cattle. 



A farmer's six months' note for commercial fer- 
tilizer, discounted and indorsed by a member bank, 
is agricultural paper eligible for rediscount with 
the Federal reserve bank. 

(Informal Ruling, Page 75, June, 1915, Bulletin.) 

Mortgages on cattle are not required, and the 
question whether paper secured by cattle is self- 
liquidating is a legal one to be determined at the 
Federal reserve bank. 

(Informal Ruling, Page 74, June, 1915, Bulletin.) 

The Act does not require the taking of chattel 
mortgages as security for loans based on agricul- 
tural operations. The statement of the member 
bank to this effect must ordinarily be accepted. 
The direct, primary purpose of the loan should be 
for the ordinary operations of agriculture. Words 
"based on" are not considered synonymous with 
"secured by." Agricultural paper need not be di- 
rectly secured by agricultural products, but should 
be genuinely based upon transactions entered upon 
for agricultural operations. General banking pru- 
dence and knowledge should be applied. 

(Informal Ruling, Page 72, June, 1915, Bulletin.) 

Notes signed by a farmer, the proceeds of which 
are used for the purchase of cows to be used as dairy 
cattle, are eligible for rediscount at the discretion 
of the Federal reserve bank notwithstanding the 
fact that the cattle are not primarily purchased for 
"breeding, raising, fattening, and marketing of 
live stock." 

(Informal Ruling, Page 112, March, 1916, Bulletin.) 



Rediscounts 93 

Loans on cattle for breeding, grazing, or fatten- Cattle for breeding 
ing may be made under the classification of six fastening" 
months' agricultural paper and the paper may be 
rediscounted by a member bank at its Federal re- 
serve bank* 

(Informal Ruling, Page 679, December, 1916, Bulletin.) 

Where tractors are used to supplement the work Notes for 
of horses or mules, or are used altogether instead of 
these animals, it is held that notes given by farmers 
for the purchase price of tractors, and maturing 
within six months, should be admitted to discount 
as agricultural paper. 

(Informal Ruling, Page 309, April, 1918, Bulletin.) 

Farmers' notes, the proceeds of which are used Farmers' notes, 
for tilling farms or for draining land already in use 
as farm land, should be classified as agricultural 
paper and are eligible for rediscount. 

(Informal Ruling, Page 743, August, 1918, Bulletin.) 

A note given for the purchase price of a com- Discount by 
modity can be classed as agricultural paper eligible maker or indorser - 
for rediscount when having a maturity in excess of 
90 days, if the maker is to use the commodity for 
an agricultural purpose, regardless of whether the 
note is discounted by the maker or by the indorser. 

(Opinion of Counsel, Page 312, April, 1918, Bulletin.) 

Where a farmer makes his note payable to the Paper payable to 
seller of a commodity, and actually uses the com- sel,er of commodIty - 
modity for agricultural purposes, such a note may 
be treated as agricultural paper, whether dis- 
counted with the member bank by the farmer as the 
maker or by the seller as the indorser. 

Where the farmer makes his note payable to the Paper payable 
member bank and uses the proceeds for an agri- 
cultural purpose, such a note may likewise be dis- 
counted by a Federal reserve bank as agricultural 
paper. If, however, in either of the foregoing cases 



94 



Commercial Banking Practice 



Identification of 
agricultural paper. 



the farmer does not use or intend to use the com- 
modity purchased for an agricultural purpose, al- 
though it is capable of being so used, the note in 
question should be treated as commercial paper and 
not as agricultural paper. 

(Informal Ruling, Page 310, April, 1918, Bulletin.) 

The nature of the bill, the name of the acceptor, 
and the name of the drawer would probably indicate 
that a farmer was the purchaser, and an implement 
dealer, the seller of the goods. However, the pur- 
chasing member bank will have to satisfy itself in 
some satisfactory way that the bill is substantially 
of an agricultural character. A simple memoran- 
dum attached to the bill, stating that the bill was 
drawn in payment of agricultural implements, 
signed either by the acceptor or the drawer, would 
probably be considered sufficient evidence by the 
member bank and the Federal reserve bank. 

(Informal Ruling, Page 68, February, 1916, Bulletin.) 



Discretion of 
Federal Reserve 
Board. 



AMOUNT OF PAPER REDISCOUNT- 
ABLE BY A FEDERAL RESERVE 
BANK 

Statutory Provisions 

Notes, drafts, and bills drawn or issued for agri- 
cultural purposes or based on live stock, and hav- 
ing a maturity not exceeding six months, exclusive 
of days of grace, may be discounted in an amount 
to be limited to a percentage of the assets of the 
Federal reserve bank, to be ascertained and fixed 
by the Federal Reserve Board. 

(Federal Reserve Act, Section 13.) 

Opinions and Rnlin^s 

Limit of agricultural The law prescribes that in the aggregate the 

by^IseTve'bank^ e total amount of agricultural paper purchased by a 

Federal reserve bank should not exceed a fixed per- 



Rediscounts 95 

centage of its capital stock, to be fixed from time to 
time for each Federal reserve bank by the Federal 
Reserve Board. The percentage fixed by the Board 
differs in the various districts. Whenever a dis- 
trict has applied, the maximum limit has been 
granted, which has been considered to be 99 per 
cent of the capital stock. 

(Informal Ruling, Page 68, February, 1916, Bulletin.) 

For other provisions governing the rediscount of 
agricultural paper, see pages 68-75, above. 



96 



Rediscount of Commodity Paper 



DEFINITION 



Commodity 
paper defined. 



Regulations of Federal Reserve Board 

Commodity paper within the meaning of this 
regulation is defined as a note, draft, bill of ex- 
change, or trade acceptance accompanied and se- 
cured by shipping documents or by a warehouse, 
terminal, or other similar receipt covering approved 
and readily marketable, nonperishable staples prop- 
erly insured. 

(Regulations of Federal Reserve Board, Regulation A, 
Series of 1917, A, VII.) 



'Staples" defined. 



Paper of mer- 
chants included. 



Potatoes a 
"staple." 



Opinions and Rulings 

"Staples" include manufactured goods as well as 
raw materials, provided the goods are nonperish- 
able and have a wide ready market. This is held 
to include cotton yarns and flour. 

(Informal Ruling, Page 523, October, 1916, Bulletin.) 

"Commodity paper" includes not only paper 
originating with the producer, but also paper of 
merchants and others when the commodity is 
not carried for speculative or purely investment 
purposes. 

(Informal Ruling, Page 307, October, 1915, Bulletin.) 

Potatoes, properly graded and packed and stored 
in a weatherproof and responsible warehouse, as 
evidenced by its receipt, would undoubtedly con- 
stitute a readily marketable, nonperishable staple. 

(Informal Ruling, Page 614, August, 1917, Bulletin.) 



Rediscounts 97 

Drafts drawn in connection with sales to the Drafu d f?™} n 
United States Government of lumber or other state* excluded, 
materials do not conform to the requirements of 
commodity paper as defined by the Federal Reserve 
Board. 

(Opinion of Counsel, Page 32, January, 1918, Bulletin.) 



ELIGIBLE COMMODITY PAPER 

Statutory Provisions 

Nothing in this Act contained shall be construed Eligibility, 
to prohibit notes, drafts, and bills of exchange se- 
cured by staple agricultural products or other 
goods, wares, or merchandise from being eligible 
for such discount. 

(Federal Reserve Act, Section 13.) 

Regulations of Federal Reserve Board 

To be eligible for rediscount at the special rates c ? n . di . ti . ons of 



authorized to be established for commodity paper, 
such a note, draft, bill of exchange, or trade ac- 
ceptance must also comply with the respective sec- 
tions of this regulation applicable to it,* must con- 
form to the requirements of the Federal reserve 
bank relating to shipping documents, receipts, 
insurance, etc., and must be a note, draft, bill of 
exchange, or trade acceptance on which the rate 
of interest or discount — including commission — 
charged the maker, does not exceed six per cent 
per annum. 

(Regulations of Federal Reserve Board, Regulation A, 
Series of 1917, A, VII.) 



* For conditions of eligibility of promissory notes, see pages 
56-61, above. For conditions of eligibility of drafts and trade 
acceptances, see pages 79-83, above. 



eligibility. 



98 



Commercial Banking Practice 



Direct discounts 
not allowed. 



Drafts drawn in 
sales to United 
States ineligible. 



Opinions and Rulings 

Federal reserve banks can not discount commod- 
ity paper directly for mercantile firms. 

(Informal Ruling, Page 112, March, 1916, Bulletin.) 

Drafts drawn in connection with sales to the 
United States Government of lumber or other ma- 
terials can not be treated as bills of exchange drawn 
against actually existing value and are subject to 
the limitations of section 5200, Revised Statutes, 
when discounted by national banks. Such drafts 
do not conform to the requirements of commodity 
paper as defined by the Federal Reserve Board 
and should not be discounted at the rate prescribed 
for such paper. 

(Opinion of Counsel, Page 32, January, 1918, Bulletin.) 



SUSPENSION OF SPECIAL RATE ON 
COMMODITY PAPER 



Rate for move- 
ment of crops. 



Regulations of Federal Reserve Board 

As the special rate on commodity paper is in- 
tended to assist actual producers during crop-mov- 
ing periods and is not designed to benefit specula- 
tors, the Board reserves the right to suspend the 
special rates herein provided whenever it is ap- 
parent that the movement of crops, which this rate 
is intended to facilitate, has been practically com- 
pleted. 

(Regulations of Federal Reserve Board, Regulation A, 
Series of 1917, A, VII.) 



99 



Rediscount of Bank Acceptances 

DEFINITION 

Regulations of Federal Reserve Board 

A banker's acceptance within the meaning of ^ c a c n e ker a * ce 
this regulation is defined as a draft or bill of ex- 
change of which the acceptor is a bank or trust 
company, or a firm, person, company, or corpora- 
tion engaged in the business of granting bankers' 
acceptance credits. 

(Regulations of Federal Reserve Board, Regulation A, 
Series of 1917, B.) 

Opinions and Rulings 

The question of determining the eligibility of an Eligible 
acceptor under the regulation is left to the discre- accep ors * 
tion of Federal reserve banks themselves. It is, of 
course, understood that the Board would not wish 
to see concerns regarded as eligible acceptors which 
are not in the habit of carrying on some acceptance 
business regularly and are not generally of such 
character and standing as to qualify their accept- 
ance as a "banker's acceptance." 

(Informal Ruling, Page 362, November, 1915, Bulletin.) 

A bill of exchange, in order to be negotiable, Conditions of 
must be an unconditional order to pay, on demand neg0 1& liy ' 
or at a fixed or determinable future time, a certain 
sum of money to order or to bearer. If payment is 
dependent upon the happening of a certain con- 
tingency, the bill is conditional and nonnegotiable. 
If payment is confined to the proceeds of a particu- Conditional bill, 
lar fund and is not chargeable to the general credit 



100 



Commercial Banking Practice 



Conditional 
acceptance. 



of the drawer, the bill is conditional and non- 
negotiable. 

A general acceptance of a conditional bill or 
a conditional acceptance of an unconditional bill 
makes the acceptance a conditional one and de- 
stroys its negotiability. 

(Opinion of Counsel, Page 21, May, 1915, Bulletin.) 



Conditions of 
eligibility. 



ELIGIBLE BANK ACCEPTANCES 

Statutory Provisions 

"Any Federal reserve bank may discount accept- 
ances of the kinds hereinafter described, which have 
a maturity at the time of discount of not more than 
three months' sight, exclusive of days of grace, and 
which are indorsed by at least one member bank." 

(Federal Reserve Act, Section 13.) 



Maturity. 



Indorsement. 



Based on imports 
and exports. 

Based on domestic 
shipments. 



Secured by 
documents. 



Drawn to furnish 
dollar exchange. 



Regulations of Federal Reserve Roard 

Any Federal reserve bank may discount for any 
of its member banks bankers' acceptances which 
have a maturity at the time of discount of not more 
than three months' sight, exclusive of days of grace, 
which are indorsed by at least one member bank, 
and which grow out of transactions involving the 
importation or exportation of goods ; or which grow 
out of transactions involving the domestic shipment 
of goods, provided shipping documents are attached 
at the time of acceptance; or which are secured at 
the time of acceptance by a warehouse receipt or 
other such document conveying or securing title 
covering readily marketable staples. Any Federal 
reserve bank may also acquire drafts or bills of ex- 
change drawn on member banks by banks or bank- 
ers in foreign countries or dependencies or insular 
possessions of the United States for the purpose of 
furnishing dollar exchange. 



Rediscounts 101 

To be eligible for rediscount the bill must have 
been drawn under a credit opened for the purpose 
of conducting, or settling accounts resulting from, 
a transaction or transactions involving: 

( 1 ) The shipment of goods between the United Ba * e . d on "ports 
States and any foreign country, or between the an ,mpor 
United States and any of its dependencies or insu- 
lar possessions, or between foreign countries ; or 

(2) The domestic shipment of goods, pro- Jjj"^™ domestic 
vided shipping documents are attached at the time s ipm< 

of acceptance; or 

(3) It must be a bill which is secured at the Based on ware- 
time of acceptance by a warehouse receipt or other 

such document conveying or securing title covering 
readily marketable staples. 

(4) Any Federal reserve bank may also ac- |£™ n *° c [ u a r n ni e h 
quire drafts or bilk drawn by a bank or banker in 

a foreign country or dependency or insular posses- 
sion of the United States for the purpose of furnish- 
ing dollar exchange and accepted by a member 
bank. Such drafts or bills may be acquired prior 
to acceptance provided they have the indorsement 
of a member bank. 

(Regulations of Federal Reserve Board, Regulation A, 
Series of 1917, B.) 

Opinions and Rulings 

There is some doubt in the courts whether the f^ e j^ *J fact 
mere reference to a particular consignment of goods n imports or 
makes the bill conditional, some courts stating that "ports, 
it is merely an indication of the fund out of which 
the drawee is to reimburse himself; other courts 
holding that it makes the bill conditional because 
limiting payment to the proceeds of the particular 
shipment referred to. There is no doubt, however, 
that a reference, in general terms, on the face of an 
accepted bill to the fact that it is based on the ex- 



102 



Commercial Banking Practice 



Acceptances 
indorsed by member 
bank of another 
district. 



Discount of 
acceptances not 
paid at Federal 
reserve bank. 



portation or importation of goods would not make 
it conditional and nonnegotiable, and it would not, 
therefore, be ineligible for discount under the pro- 
visions of section 13 of the Federal Reserve Act. 

(Opinion of Counsel, Page 21, May, 1915, Bulletin.) 

Federal reserve banks may, under the provisions 
of section 13, discount acceptances based on the im- 
portation or exportation of goods, provided they 
have a maturity at time of discount of not more 
than three months, and provided, further, that they 
are indorsed by at least one member bank. It is im- 
material whether this member bank is located in the 
district of the Federal reserve bank which is mak- 
ing the discount or in any other district, the term 
"member bank" being broad enough to include 
member banks wherever located. 

(Opinion of Counsel, Page 98, June, 1915, Bulletin.) 

The discount committee of the Federal Reserve 
Board has reported that, in its opinion, "Federal 
reserve banks should insist that acceptances when 
due should be paid by checks on the local Federal 
reserve bank, in order that they may be charged to 
the account of the acceptor on the day of maturity, 
or else that acceptances should be paid by checks 
through the clearings. If an arrangement on these 
lines can not be perfected, Federal reserve banks 
ought to be required to add one day to the actual 
number of days the acceptance has to run when 
bought, so as to make up for the loss of interest 
incurred in collecting in this manner." 

This report has been agreed to by the Board, and 
your bank is requested, in buying acceptances, to 
charge discount for one additional day, except in 
cases where satisfactory arrangements are made to 
make actual cash payment at the Federal reserve 
bank on the day of maturity. 

(Informal Ruling, Page 521, June, 1918, Bulletin.) 



Rediscounts 103 

Acceptances of an acceptance corporation ought Pa P er of acce .p*- 
to be dealt with exactly as would be the acceptances 
of a prime private banker. These acceptance cor- 
porations are in the same relation to the Federal 
Reserve System as the private bankers. They can 
not become members, but, inasmuch as they expect 
to give full information about their own financial 
standing and the nature of their acceptances, and 
as they exercise a most important function for the 
further development of our acceptance business and 
discount market, their operation ought to be en- 
couraged in every respect. 

(Informal Ruling, Page 634, July, 1918, Bulletin.) 

In purchasing or discounting bankers' accept- Warehouse receipts 

r » O r of independent 

ances or other bills which are secured by warehouse warehouses, 
receipts, etc., the Federal reserve banks should 
make sure that the receipt is issued by a warehouse 
which is independent of the borrower. 

(Informal Ruling, Page 30, January, 1917, Bulletin.) 

Gold coin is "goods" within the meaning of sec- GoId coin as M *° oJ *-" 
tion 13 of the Federal Reserve Act. 

(Informal Ruling, Page 29, January, 1917, Bulletin.) 

Gold bars may be properly considered as Gold hullion 
"goods." as " g00d8 -" 

(Informal Ruling, Page 29, January, 1917, Bulletin.) 

While a very decided differential may be inadvis- Differential rate 
able, there is no objection to a moderate differential, acceptances, 
say J4 of 1 per cent, to apply between member- 
bank acceptances and the acceptances of large non- 
member institutions well known throughout the 
country and whose acceptances necessarily have a 
broad market. 

(Informal Ruling, Page 28, January, 1917, Bulletin.) 

For additional opinions and rulings bearing on 
this subject, see Part I, "Bank Acceptances," pages 
16-21, 29-31, 33-35, 38-42, above. 



104 



Commercial Banking Practice 



Chattel mortgages. 



Bills payable 
outside United 
States. 



INELIGIBLE BANK ACCEPTANCES 

Opinions and Rulings 

The Board, having reached the conclusion that 
national banks are not authorized to accept bills 
secured by chattel mortgages on cattle, deems it 
advisable that Federal reserve banks should con- 
sider as ineligible bills drawn against the security 
of such chattel mortgages, whether accepted by 
member or nonmember banks. 

(Informal Ruling, Page 309, April, 1918, Bulletin.) 

Under the regulations of the Federal Reserve 
Board defining bankers' acceptances, any bill which 
is payable elsewhere than in the United States 
would not be eligible for purchase as a bankers' ac- 
ceptance, under the provisions of Regulations A 
and B, Series of 1917, even though eligible in all 
other respects. 

The acceptance, however, might properly be pur- 
chased as a bill of exchange payable in a foreign 
country. 

(Informal Ruling, Page 520, June, 1918, Bulletin.) 

For additional opinions and rulings bearing on 
this subject, see Part I, "Bank Acceptances," pages 
16-21, 29-31, 33-35, 38-42, above. 



Evidence fur- 
nished Federal 
reserve bank. 



EVIDENCE OF ELIGIBILITY 

Regulations of Federal Reserve Board 

A Federal reserve bank must be satisfied, either 
by reference to the acceptance itself or otherwise, 
that it is eligible for rediscount. Satisfactory evi- 
dence of eligibility may consist of a stamp or cer- 
tificate affixed by the acceptor in form satisfactory 
to the Federal reserve bank. 

(Regulations of Federal Reserve Board, Regulation A, 
Series of 1917, B.) 



Rediscounts 



105 



Opinions and Rulings 

The Federal reserve bank reserves the right to Req««'e»e»* 
ask State member banks for evidence underlying 
the certification given to it, and the bank examiner 
may require evidence from the national bank. 
Member banks would, therefore, best protect them- 
selves by stipulating for themselves the right at 
times to ask for substantiation of the assurances 
given by their customers. 

(Informal Ruling, Page 406, December, 1915, Bulletin.) 

MATURITY 

Statutory Provisions 

"Any Federal reserve bank may discount accept- Three months, 
a rices . . . which have a maturity at the time of dis- 
count of not more than three months' sight, ex- 
clusive of days of grace." 

(Federal Reserve Act, Section 13.) 

Regulations of Federal Reserve Roard 

Federal reserve banks may discount for their 
member banks "bankers' acceptances which have a 
maturity at the time of discount of not more than 
three months' sight, exclusive of days of grace. 



(Regulations of Federal Reserve Board, Regulation A, 
Series of 1917, B.) 

Opinions and Rulings 

Acceptance business of Federal reserve banks is 
not restricted "to the original transactions only," if Renewals, 
the transaction has not been liquidated. When the 
first acceptance matures, member bank may renew 
the acceptance, and there is no reason why a Fed- 
eral reserve bank may not discount such renewed 
acceptance, although a Federal reserve bank must 
not engage in advance to make such discount of a 
renewal. 

(Informal Ruling, Page 126, July, 1915, Bulletin.) 



106 



Commercial Banking Practice 



INDORSEMENT 



Member bank 
indorsement. 



Statutory Provisions 

Any Federal reserve bank may discount accept- 
ances . . . which are indorsed by at least one mem- 
ber bank. 

(Federal Reserve Act, Section 13.) 



Indorsement 
in blank. 



Opinions and Rulings 

If the acceptance is indorsed in blank it can of 
course change ownership from one holder to an- 
other without being indorsed by each subsequent 
holder, and the title would pass. 

The Board expresses the hope that we may soon 
reach the point when Federal reserve banks can 
make a definite rule not to buy bankers' acceptances 
except such as bear three responsible signatures, 
being those of the acceptor, the drawer, and the 
indorser. 

(Informal Ruling, Page 744, August, 1918, Bulletin.) 



PART III. 



Advances by Federal 
Reserve Banks 

on the 

Promissory Notes of 
Member Banks 



109 



PART III. 

Advances by 
Federal Reserve Banks 

General Statutory Provisions 

"Any Federal reserve bank may make advances Maturity, 
to its member banks on their promissory notes for 
a period not exceeding fifteen days at rates to be 
established by such Federal reserve banks, subject 
to the review and determination of the Federal Re- 
serve Board, provided such promissory notes are Security: 
secured by such notes, drafts, bills of exchange, or 
bankers' acceptances as are eligible for rediscount Eligible paper; 
or for purchase by Federal reserve banks under the 
provisions of this Act, or by the deposit or pledge United states 
of bonds or notes of the United States." obligations; 

(Federal Reserve Act, Section 13.) 

"The Federal reserve banks shall be authorized, War Finance 
subject to the maturity limitations of the Federal Cor P° ration bond »- 
Reserve Act and to regulations of the Federal Re- 
serve Board, to discount the direct obligations of 
member banks secured by . . . bonds of the [War 
Finance] Corporation." 

(War Finance Corporation Act, Section 13.) 

SECURITY 

Announcement sjof Federal Reserve Roard 

Advances may be made to member banks on their Eligible paper 

, i *ii i i i or Government 

promissory notes, secured either by such notes, obligations, 
drafts, bills of exchange, or bankers' acceptances 



110 



Commercial Banking Practice 



Indorsement of 
collateral. 



Collateral of 
Government bonds. 



County warrants 
ineligible. 



Farm loan 
bonds ineligible. 



as are eligible for rediscount or purchase by Federal 
reserve banks, or by the deposit or pledge of bonds 
or notes of the United States. 

(Announcement of Federal Reserve Board, Page 513, Octo- 
ber, 1916, Bulletin.) 

Opinions and Hillings 

Eligible paper pledged as security for a promis- 
sory note of a member bank on which an advance is 
being made by a Federal reserve bank need not be 
indorsed by such member bank if such eligible paper 
is already in negotiable form. 

(Opinion of Counsel, Page 685, December, 1916, Bulletin.) 

Any member bank which has itself purchased ob- 
ligations of the United States may procure ad- 
vances from its Federal reserve bank, for not ex- 
ceeding 15 days, on its own promissory note, pro- 
vided such note is secured by a deposit or pledge of 
bonds or notes of the United States. 

(Informal Ruling, Page 159, March, 1917, Bulletin.) 

Member banks in procuring advances from Fed- 
eral reserve banks on promissory notes must secure 
such notes by paper eligible for rediscount or for 
purchase by Federal reserve banks or by bonds or 
notes of the United States. County warrants are 
not eligible as security. 

(Opinion of Counsel, Page 609, November, 1916, Bulletin.) 

Farm loan bonds are issued by Federal farm land 
banks incorporated under Federal law, and are not 
obligations of the United States, so that they are 
not eligible as collateral for promissory notes of 
member banks. 

(Opinion of Counsel, Page 33, January, 1918, Bulletin.) 

For conditions of eligibility of notes, drafts, and 
acceptances, see pages 56-61, 79-83, 91-94, 97-98, 
100-103, above. 



Advances by Reserve Banks 111 

MATURITY 

Statutory Provisions 

Any Federal reserve bank may make advances to Fifteen day*, 
its member banks on their promissory notes for 
periods not exceeding fifteen days. 

(Federal Reserve Act, Section 13.) 

Opinions and Rulings 

If by reason of a State law paper falling due on Notes due on Sunday 
Saturday or Sunday must be collected one or two or ega ° * ay * 
days before its apparent maturity or one or two 
days thereafter, interest should be charged ac- 
cordingly. 

(Informal Ruling, Page 108, February, 1918, Bulletin.) 

A Federal reserve bank may properly renew the Renewals 
15-day notes of its member banks if properly se- permitte ■ 
cured, provided that the Federal reserve bank does 
not obligate itself in advance to make any such 
renewal. 

(Opinion of Counsel, Page 765, October, 1917, Bulletin.) 

While the Federal Reserve Board does not wish Renewals not 
to prohibit the renewal of 15-day notes, it feels that encourage 
renewals should be the exception rather than the 
rule. 

(Informal Ruling, Page 879, November, 1917, Bulletin.) 



PART IV. 



Open Market 
Transactions 



115 



PART ^ IV. 

Open Market Transactions 

General Statutory Provisions 

"Any Federal reserve bank may, under rules and CatIe transfers, 
regulations prescribed by the Federal Reserve an^buu* 8 ' 
Board, purchase and sell in the open market, at 
home or abroad, either from or to domestic or for- 
eign banks, firms, corporations, or individuals, 
cable transfers and bankers' acceptances and bills 
of exchange of the kinds and maturities by this 
Act made eligible for rediscount, with or without 
the indorsement of a member bank. 

"Every Federal reserve bank shall have power Commercial bills. 
... to purchase from member banks and to sell, 
with or without its indorsement, bills of exchange 
arising out of commercial transactions, as herein- 
before defined. ..." 

(Federal Reserve Act, Section 14.) 

General Regulations and Rulings 

Regulations of Federal Reserve Board 

The Federal Reserve Board, exercising its statu- Conditions 
tory right to regulate the purchase of bills of ex- digibiHty. 
change and acceptances, has determined that a bill 
of exchange or acceptance, to be eligible for pur- 
chase by Federal reserve banks under section 14 : 

(a) Must not have been issued for carrying or Security paper, 
trading in stocks, bonds, or other investment secur- 
ities, except bonds and notes of the Government of 
the United States; 



116 



Commercial Banking Practice 



Fixed, speculative, or 
investment paper. 



Acceptance required. 



Secured bills. 



Other 
requirements. 



(b) Must not be a bill the proceeds of which 
have been used or are to be used for permanent or 
fixed investments of any kind, such as land, build- 
ings, or machinery, or for investments of a merely 
speculative character; 

(c) Must have been accepted by the drawee 
prior to purchase by a Federal reserve bank unless 
it is accompanied and secured by shipping docu- 
ments or by a warehouse, terminal, or other similar 
receipt conveying or securing title; 

(d) May be secured by the pledge of goods* 
or collateral, provided it is otherwise eligible. 

In addition to the above general requirements, 
each bill of exchange and trade acceptance pur- 
chased under the terms of this regulation must also 
conform to the more specific requirements set forth 
under Regulation B, III (see page 124), and 
each bankers' acceptance must also conform to the 
more specific requirements set forth under Regu- 
lation B, IV (see pages 118-119) . 

(Regulations of Federal Reserve Board, Regulation B, 
Series of 1917, II.) 



Opinionsland Rulings 



Promissory notes 
excluded. 



The original bill for the establishment of Federal 
reserve banks permitted the purchase in the open 
market of "notes, drafts, and bills of exchange," 
but in the bill as finally enacted the words "notes 
and drafts" were stricken out in section 14, although 
they are retained in section 13. The Board has 
reached the conclusion, in which it is sustained by 
opinion of counsel, that Congress drew a distinction 
in sections 13 and 14 between the several forms of 



* When used in this regulation the word "goods" shall be 
construed to include goods, wares, merchandise, or agricultural 
products, including live stock. 



Open Market Transactions 117 

commercial paper, and that promissory notes, even 
though bearing an additional indorsement, must be 
regarded as excluded from open market purchases 
under section 14. 

There remain, then, as eligible for purchase under Eli * ib,e p*P er - 
this section, "cable transfers" and "bills of ex- 
change" of two kinds: (1) So-called foreign bills of 
exchange; and (2) domestic acceptances drawn by 
one party on another, as by a seller of goods upon 
the purchaser, such as have been classified by the 
Board as trade acceptances either accepted or not 
accepted at the time of purchase. 

The decision whether Federal reserve banks 
should engage in such open market operations rests 
entirely with them and not with the Federal Re- 
serve Board. 

Banks are cautioned that no bill be bought in the 
open market which, even if indorsed by a member 
bank, would be ineligible for rediscount under sec- 
tion 13. 

(Informal Ruling, Page 360, November, 1915, Bulletin.) 

Any Federal reserve bank may, under the pro- Promi " ^ note «- 
visions of section 14 of the Federal Reserve Act, 
purchase acceptances and bills of exchange of cer- 
tain kinds and maturities in the open market; but 
promissory notes as distinguished from bills of ex- 
change, whether one or more names, are not eligible 
for such purchase. 

(Opinion of Counsel, Page $65, November, 1915, Bulletin.) 

The purchase of commodity loans from member Commodit r p 8 p w - 
banks without their indorsement would not come 
within the provisions of the law unless there is two- 
name commodity paper or such paper can be 
created in connection with commodity loans. 

(Informal Ruling, Page 406, December, 1915, Bulletin.) 



118 



Transactions in Bank 
Acceptances 



DEFINITION 



Banker's 
acceptance. 



Regulations of Federal Reserve Board 

A banker's acceptance, within the meaning of this 
regulation, is a bill of exchange of which the ac- 
ceptor is a bank or trust company, or a firm, person, 
company, or corporation engaged in the business 
of granting bankers' acceptance credits. 

(Regulations of Federal Reserve Board, Regulation B, 
Series of 1917, IV.) 



Cable transfers 
and bankers' 
acceptances. 



^ELIGIBLE BANK ACCEPTANCES 

Statutory Provisions 

Any Federal reserve bank may . • . "Purchase 
and sell . . . cable transfers and bankers' accept- 
ances ... of the kinds and maturities by this Act 
made eligible for rediscount, with or without the in- 
dorsement of a member bank. 

(Federal Reserve Act, Section 14.) 



Based on imports 
and exports. 



Regulations of Federal Reserve Board 

To be eligible for purchase, the bill . . . must 
have been drawn under a credit opened for the 
purpose of conducting or settling accounts resulting 
from a transaction or transactions involving: 

(I) The shipment of goods between the United 
States and any foreign country, or between the 



Open Market Transactions 119 

United States and any of its dependencies or in- 
sular possessions, or between foreign countries ; 

(2) The shipment of goods within the United J™ d $ti c B shipment$ . 
States, provided the bill at the time of its accept- 
ance is accompanied by shipping documents ; 

(3) The storage within the United States of w^ehUse^eceipts. 
readily marketable goods, provided the acceptor of 

the bill is secured by warehouse, terminal, or other 
similar receipt ; 

(4) The storage within the United States of f aS goods sold** 
goods which have been actually sold, provided the 
acceptor of the bill is secured by the pledge of such 

goods ; 

(5) Or it must be a bill drawn by a bank or *^£j£^ 
banker in a foreign country or dependency or in- 
sular possession of the United States for the pur- 
pose of furnishing dollar exchange. In this latter 

case the bank or banker drawing the bill must be 
in a countrv, dependency, or possession whose us- 
ages of trade have been determined by the Federal 
Reserve Board to require the drawing of bills of 
this character. 

(Regulations of Federal Reserve Board, Regulation B, 
Series of 1917, IV.) 

'Opinions and Rnlin^s ^ 

Gold bars may be properlv considered as goods, Bu !,on s ipmeDts * 
and accordingly 60-day bills when accepted by 
banks and bankers against such shipment would be 
eligible for purchase by Federal reserve banks as 
based upon or involving the exportation of goods. 

(Informal Ruling, Page 29, January, 1917, Bulletin.) 

Gold coin is "goods" within the meaning of sec- 0,n s ipments ' 
tion 13 of the Federal Reserve Act; and, therefore. 
a bill of exchange drawn to finance a shipment of 
gold coin from this country is eligible for purchase 
by a Federal reserve bank if otherwise in conform- 



120 



Commercial Banking Practice 



ity with the provisions of the law and the regula- 
tions of the Federal Reserve Board. 

(Informal Ruling, Page 29, January, 1917, Bulletin.) 

For additional rulings, see, under Part II, "Rediscounts with 
Federal Reserve Bank," pages 100-103, above. 

INELIGIBLE BANK ACCEPTANCES 



Acceptances not 
based on sales 
and not secured. 



Acceptances 
secured by 
bill of sale. 



Bills payable out- 
side United States. 



Opinions and Rulings 

Acceptances drawn by a manufacturer on and 
accepted by a trust company not a member of the 
Federal Reserve System, the proceeds of which are 
to be used for purchases of raw material and pay- 
ment for labor where the goods had not been sold 
and no warehouse receipts or other instruments 
could be furnished, are held not to be eligible for 
purchase by a Federal reserve bank. 

(Informal Ruling, Page 65, February, 1916, Bulletin.) 

A banker's acceptance drawn for the purpose of 
purchasing goods secured by a bill of sale of stock 
in hand is not eligible for purchase by Federal re- 
serve banks. 

(Opinion of Counsel, Page 684, December, 1916, Bulletin.) 

Under the regulations of the Federal Reserve 
Board defining bankers' acceptances, any bill which 
is payable elsewhere than in the United States 
would not be eligible for purchase as a bankers' 
acceptance, under the provisions of Regulations 
A and B, Series of 1917, even though eligible in all 
other respects. 

The acceptance, however, might properly be pur- 
chased as a bill of exchange pavable in a foreign 
country. T ~*7?! !, 3P 

(Informal Ruling, Page 520, June, 1918, Bulletin.) 

For additional rulings, see, under Part II, "Rediscounts with 
Federal Reserve Bank," page 104, above. 



Open Market Transactions 121 

EVIDENCE OF ELIGIBILITY AND RE- 
QUIREMENT OF STATEMENTS 

Regulations of Federal.Reserve Hoard 

A Federal reserve bank must be satisfied either Evidence of 
by reference to the acceptance itself, or otherwise, eli 8»i>iKty. 
that it is eligible for purchase. Satisfactory evi- 
dence of eligibility may consist of a stamp or cer- 
tificate affixed by the acceptor, in form satisfactory 
to the Federal reserve bank. No evidence of eligi- Exception of 
bility is required with respect to a bill accepted by nath)nai ce bank« by 
a national bank. 

Bankers' acceptances, other than those accepted statements, 
or indorsed by member banks, shall be eligible for 
purchase only after the acceptor has furnished a 
satisfactory statement of financial condition in form 
to be approved by the Federal Reserve Board and 
has agreed in writing with a Federal reserve bank 
to inform it upon request concerning the transac- 
tions underlying such acceptances. 

(Regulations of Federal Reserve Board, Regulation B, 
Series of 1917, IV.) 

Opinions and Rulings 

Ultimate responsibility in purchasing accept- Responsibility 
ances is held to rest with Federal reserve banks. for eli ^ biIit y- 

The announcement that the Federal Reserve 
Board will require statements satisfactory to it in statement form, 
connection with acceptances is held to mean that 
the statement shall be satisfactory in form. 

(Informal Ruling, Page 13, January, 1916, Bulletin.) 

MATURITY 

Statutory Provisions 

Any Federal reserve bank may . . . pur- 
chase and sell . . . cable transfers and bank- 



122 Commercial Banking Practice 

er's acceptances ... of the kinds and maturi- 
ties by this Act made eligible for rediscount. 

(Federal Reserve Act, Section 14.) 

Regulations of Federal Reserve Roard 

To be eligible for purchase, the bill must have a 
maturity at time of purchase of not more than three 
months, exclusive of days of grace. 

(Regulations of Federal Reserve Board, Regulation B, Series 
of 1917, IV.) 



123 



Transactions in Bills of Exchange 
and Trade Acceptances 

DEFINITIONS 

Regulations of Eederal.Reserve Board 

A bill of exchange, within the meaning of this Bill of exchange, 
regulation, is defined as an unconditional order in 
writing, addressed by one person to another, other 
than a banker . . . signed by the person giving it, 
requiring the person to whom it is addressed to pay, 
in the United States, at a fixed or determinable 
future time, a sum certain in dollars to the order of 
a specified person; and 

A trade acceptance is defined as a bill of ex- Trade acceptance, 
change drawn by the seller on the purchaser of 
goods sold, and accepted by such purchaser. 

(Regulations of Federal Reserve Board, Regulation B, 
Series of 1917, III.) 

ELIGIBLE BILLS AND TRADE 
ACCEPTANCES 

Statutory Provisions 

Any Federal reserve bank may . . . purchase Eligible bills, 
and sell in the open market . . . bills of exchange 
of the kinds and maturities by this Act made eligible 
for rediscount. 

(Federal Reserve Act, Section 14.) 

Regulations of Federal Reserve Board 

A bill of exchange or acceptance to be eligible General conditions 
for purchase by Federal reserve banks under sec- ° e Igl ! lty ' 
tion 14: 



124 



Commercial Banking Practice 



Specific conditions. 



Commercial 
character. 



Maturity. 



(1) Must have been accepted by the drawee 
prior to purchase by a Federal reserve bank unless 
it is accompanied and secured by shipping docu- 
ments or by a warehouse, terminal, or other similar 
receipt conveying security title; 

(2) May be secured by the pledge of goods* 
or collateral, provided it is otherwise eligible. 

In addition to the above general requirements, 
each bill of exchange and trade acceptance pur- 
chased under the terms of this regulation must also 
conform to the more specific requirements set forth 
under Regulation B, III (below). 

(Regulations of Federal Reserve Board, Regulation B, 
Series of 1917, II.) 

To be eligible for purchase, the bill must have 
arisen out of an actual commercial transaction, 
domestic or foreign; that is, it must be a bill which 
has been issued or drawn for agricultural, industrial, 
or commercial purposes or the proceeds of which 
have been used or are to be used for the purpose of 
producing, purchasing, carrying, or marketing 
goods in one or more of the steps of the process of 
production, manufacture, or distribution. It must 
have a maturity at time of purchase of not more 
than ninety days, exclusive of days of grace. 

(Regulations of Federal Reserve Board, Regulation B, 
Series of 1917, III.) 



Opinions and Rnlin^s 

See "Rediscount of Drafts and Trade Accept- 
ances," pages 79-83, above. 



*When used in this regulation the word "goods" shall be 
construed to include goods, wares, merchandise, or agricultural 
products, including live stock. 



Open Market Transactions 125 

INELIGIBLE BILLS AND TRADE 
ACCEPTANCES 

Regulations of Federal Reserve Board 

A bill of exchange or acceptance, to be eligible Finance paper, 
for purchase by Federal reserve banks under sec- 
tion 14, must not have been issued for carrying or 
trading in stocks, bonds, or other investment secur- 
ities, except bonds and notes of the Government of 
the United States; and must not be a bill the pro- 
ceeds of which have been used or are to be used for 
permanent or fixed investments of any kind, such 
as land, buildings, or machinery, or for investments 
of a merely speculative character. 

(Regulations of Federal Reserve Board, Regulation B, 
Series of 1917, II.) 

Opinions and Rulings 

An instrument in the form of a bill of exchange, Draft drawn 
drawn by an agent of a corporation upon the cor- J n "^J ratlon 
poration itself, is not a bill of exchange such as is 
eligible for purchase in the open market by Federal 
reserve banks. 

(Opinion of Counsel, Page 462, September, 1916, Bulletin.) 

The fact that a land company has stamped a bill stamp " T ™ de 
a trade acceptance and has signed such statement as nomine"" 
"acceptor" does not in itself make it a trade accept- 
ance. The bill was accepted by the bank and not 
by the land company and is therefore not eligible 
for purchase under the regulations which require a 
bill to be accepted by the drawee. 

(Informal Ruling, Page 112, March, 1916, Bulletin.) 

For additional rulings, see, under "Rediscount of Drafts and 
Trade Acceptances," pages 83-84, above. 



126 



Commercial Banking Practice 



EVIDENCE OF ELIGIBILITY AND RE- 
QUIREMENT OF STATEMENTS 

Regulations of Federal Reserve Board 



Evidence of 
eligibility. 



Statement*. 



A Federal reserve bank shall take such steps as 
it deems necessary to satisfy itself as to the eligibil- 
ity of the bill offered for purchase, unless it presents 
prima facie evidence thereof or bears a stamp or 
certificate affixed by the acceptor or drawer show- 
ing that it is a trade acceptance. 

Unless indorsed by a member bank, a bill is not 
eligible for purchase until a satisfactory statement 
has been furnished of the financial condition of one 
or more of the parties thereto. 

(Regulations of Federal Reserve Board, Regulation B, 
Series of 1917, III.) 



Opinions and Rulings 



Stamp "Trade 
Acceptance" 
has no value. 



The fact that a land company has stamped a bill 
a trade acceptance and has signed such statement 
as "acceptor" does not in itself make it a trade ac- 
ceptance. 

(Informal Ruling, Page 112, March, 1916, Bulletin.) 



MATURITY 



Ninety day». 



Statutory Provisions 

Any Federal reserve bank may . . . purchase 
and sell . . . bills of exchange of the . . . maturi- 
ties by this Act made eligible for rediscount. 

(Federal Reserve Act, Section 14.) 



Open Market Transactions 127 

Regulations of Federal Reserve Roard 

To be eligible for purchase, the bill must have 
... a maturity at time of purchase of not more 
than 90 days, exclusive of days of grace. 

(Regulations of Federal Reserve Board, Regulation B, 
Series of 1917, III.) 

For additional rulings see, under "Rediscount of Drafts and 
Trade Acceptances," pages 85-86, above. 



INDEX 

PAGES 

Acceptance agreements, duration of 13-15, 21-22, 36 

Acceptance, bank, defined 9, 99, 118 

Acceptance corporation, rediscount of acceptances of 103 

Acceptance credits, syndicate 14-15 

Acceptance defined 9 

Acceptance house, rediscount of paper of 103 

Acceptance policy of Federal Reserve Board: 

General statement 13-14 

Relative to syndicate acceptance credits 14-15 

Acceptance, trade, defined 9, 78-79, 123 

Acceptances, bank: 

Based on domestic shipments of goods 33-37 

Actual security, what constitutes 24 

Actual transaction must be involved 34 

Amount bank may accept 23-25, 36-37 

Bill of lading does not necessarily render draft eligible 34 

Character, statutory provisions governing 33 

Duration of letters of credit 36 

Eligibility not dependent on security alone 34 

Maturity 34, 35-36 

Purchase of bank's own acceptance *. 37 

Release of shipping documents 34-35 

Sale of goods not required to be involved 34 

Shipment from principal to agent 34 

Shipping documents in possession of bank's agent 33 

Shipping documents must convey title 33 

U. S. Revised Statutes, section 5202, limitations of, not applicable to 

bank acceptances 37 

Based on imports and exports 16-28 

Acceptance at instance of exporter 18 

, Acceptance prior to purchase or sale 19-20 

Acceptances in addition to loans 25 

Actual security, what constitutes ; 24 

Amount bank may accept 23-28 

Bullion as goods 21 

Coin as goods 21 

Delay in shipment immaterial 19 

Drafts accepted at instance of exporter 18 

Drafts against collateral of acceptances 20 

Drafts drawn under contracts independent of export transaction 17 

Duration of acceptance credits 21-22 

Exemption from ten per cent limit 23-24 

Export contract not fulfilled 19 

Foreign correspondents, acceptances by, under guarantee 27 

Future importations of goods 19 

General summary of limitations upon 28 

Good faith a test in determining character 16 

Goods defined 21 

Guarantee, acceptances by foreign correspondents under 27 

Identification of specific goods not required 16 

Limitation on bank's liabilities, not applicable to acceptances 27 

Limitation on loans to one borrower 24-25 

See also U. S. Revised Statutes, section 5200 

Loans up to ten per cent limit, acceptances in addition to 25 

Maturity 21-22 



PAGES 

Acceptances, bank — continued 

Based on imports and exports — continued 

Option in method of securing acceptances 17 

Permission to accept not required 27 

Permission to accept to amount of capital and surplus, application for 26 

Proof of assurances as to character 17 

Purchase of bank's own acceptances 27 

Purchase of goods subsequent to acceptance of draft 19 

Renewal of acceptances 22 

Sales to allied purchasing commission 18 

Secured bills exempt from ten per cent limit 23 

Statutory provisions governing 16 

Transaction must itself involve import or export 17-18 

Transactions independent of import or export transaction, not suf- 
ficient basis 17 

Trust receipts as actual security 24 

Ultimate export of goods, not sufficient basis 18 

U. S. Revised Statutes, section 5200, limitations of 24-25 

U. S. Revised Statutes, section 5202, limitations of 27 

Executed to furnish dollar exchange 29-32 

Amount bank may accept , 31-32 

Limitation on bank's liabilities 32 

Maturity, statutory provisions governing 31 

Permission to accept, application for 29-30 

General statutory provisions 11-12 

Investment in acceptances by member banks 43-46 

Acceptances as commercial or business paper 44-45 

Actually existing value, bills drawn against 43-44 

Bills discounted after removal of documents 44 

Bills discounted before or after acceptance 43-44 

Bills of exchange include bank acceptances 43 

Bills secured by shipping documents or goods 43-44 

Purchase or discount of acceptances 44-46 

Reissuance of purchased acceptance 46 

U. S. Revised Statutes, section 5200 43, 45-46 

Secured by warehouse receipts 38-42 

Amount bank may accept 23-25, 36-37, 42 

Bill of sale not eligible security 41 

Control of warehouse by acceptor 39 

Custodian of wool, receipts issued by 40 

Eligible security 38-41 

Ineligible security 41-42 

Maturity 35-36, 42 

Release of warehouse receipts 35, 42 

Security not specified 42 

Substitution of warehouse receipts 42 

Sugar in bond, acceptances against 40 

Warehouse receipts: 

Issued by independent warehouses 38-39 

Issued by lessee 39 

Statutory provisions 11-12 

Syndicate acceptance credits 14-15 

See also Acceptance policy of Federal Reserve Board 

Use of bank acceptances 9-10 

Warehouse receipts, acceptances secured by 38-42 

See also Acceptances, bank, Secured by warehouse receipts 



PAQE8 

Acceptances, trade: 

Definition of 9, 78-79, 123 

Must be accepted by drawee 78 

Open market transactions in 123-127 

See also Open market transactions, Bills of exchange and trade accept- 
ances 

Place of payment of trade acceptance 78 

Rediscount of 76-89 

See also Rediscount of, Drafts and trade acceptances 

Actually existing value, what constitutes 44-45, 87-89 

Advances by Federal reserve banks on promissory notes of member banks. .109-111 

Collateral 109-110 

County warrants not eligible collateral 110 

Farm loan bonds not eligible collateral 110 

Indorsement of collateral 110 

Maturity Ill 

Renewals of member banks' notes Ill 

General statutory provisions 109 

Security for advances 109-110 

Sunday or legal holiday, notes due on Ill 

Advertising space, trade acceptances based on 82 

Agricultural paper, rediscount of 90-95 

See also Rediscount of, Agricultural paper 
Assignment of open accounts, ineligible for rediscount 58 

Bank acceptance defined 9, 99, 118 

Bank acceptances, see Acceptances, bank 

Bill of exchange, definition of 76-78, 123 

Bill of lading, draft secured by 34 

Bill of sale, not eligible as security for bank acceptance 41, 120 

Bills of exchange: 

Drawn against actually existing value 87-89 

Include bank acceptances 44 

Open market transactions in 123-127 

See also Open market transactions, Bills of exchange and trade accept- 
ances 

Payable elsewhere than in the United States, rediscount of 104 

Presentment for acceptance 76 

Rediscount of 76-89 

See also Rediscount of, Drafts and trade acceptances 

Broker's paper, discount of 63 

Cattle paper, see Chattel mortgages 

Chattel mortgages, as security for agricultural paper 92 

Chattel mortgages, bank acceptances against 41, 104 

Collateral notes: 

Eligibility for rediscount 57, 59-60, 63-64 

Not eligible security for bank acceptances 41 

See also Advances by Federal reserve banks, Collateral 

Collateral trust notes, ineligible for rediscount 64 

Collection charges, bills payable with 64 

Commercial or business paper, bank acceptances as 44-45 

Commodity paper : 

Definition 96-97 

Eligibility for open market purchase 116, 117 

See also Rediscount of, Commodity paper 
Cotton mill paper, rediscount of 66 



PAQE8 

County warrants not eligible as collateral for advances 110 

Demand notes and drafts ineligible for rediscount 67 

Demand, notice, and protest, waiver'of 73, 76-77 

Discount of acceptances 24-25, 44-46 

See also Acceptances, bank, Investment in 

Documents, shipping 33-35, 44 

Dollar exchange 29-32 

See also Acceptances, bank, Executed to furnish dollar exchange 
Domestic shipments, bank acceptances based on 33-37 

See also Acceptances, bank, Based on domestic shipments 

Drafts accepted by foreign correspondents under guaranty 23 

Drafts against collateral of acceptances 20 

Drafts and bills of exchange 76-89, 123-127 

See also Open market transactions, Bills of exchange, and Rediscount 
of, Drafts and trade acceptances 

Drafts secured by bill of lading 34 

Drafts to finance capital requirements 84 

Drawee 78 

Export contract, acceptances against 19 

Finance companies, rediscount of paper of 63 

Food products, rediscount of paper secured by 60 

Foreign transactions as basis for trade acceptances 79, 82, 83 

Goods defined 21, 80, 103, 119, 124 

Holidays, legal, notes due on Ill 

Imports and exports, bank acceptances based on 16-28 

See also Acceptances, bank, Based on imports and exports 

Indorsement 73, 74, 102, 106, 110 

Investment in bank acceptances by member banks 43-46 

See also Acceptances, bank, Investment in 

Letters of credit, duration of . 21-22, 36 

Liberty bonds, loans on, may be exempted from ten per cent limit 43 

Limitation on bank's liabilities: 

Not applicable to acceptances 27, 32, 37 

Not applicable to rediscounts with reserve banks 72-73 

See also U. S. Revised Statutes, section 5202 
Limitation on loans to one borrower 43 

See also U. S. Revised Statutes, section 5200 

Limitation on rediscount of paper of one maker or indorser 68-72, 87-89 

Live stock defined 90 

Loans to individuals, Federal reserve banks do not make 57 

Loans to ten per cent limit, bank acceptances in addition to 25 

Maturity, see under appropriate class of paper 
Mortgages, see Chattel mortgages and Collateral notes 

Non-member banks, rediscount for 61, 73-75 

Notes of member banks, advances by Federal reserve banks on 109-111 

See also Advances by Federal reserve banks 

Notes, promissory, not eligible for purchase in open market 116-117 

Notes, promissory, rediscount of 56-75 

See also Rediscount of, Notes, promissory 

Open accounts 58, 81 



PAGES 

Open market transactions: 

Bank acceptances, transactions in 118-122 

Based on domestic shipments 119 

Based on imports and exports 118 

Drawn to furnish dollar exchange 119 

Eligible bank acceptances 118-120 

Evidence of eligibility and requirement of statements 121 

Ineligible bank acceptances 120 

Maturity 121-122 

Secured by goods sold 119 

Secured by warehouse receipts 119 

Unsecured acceptances 120 

Bills of exchange and trade acceptances, transactions in 123-127 

Bill of exchange defined 123 

Conditions of eligibility 123-124 

Definitions 123 

Eligible bills and trade acceptances 123-124 

Evidence of eligibility and requirement of statements 126 

Ineligible bills and trade acceptances 125 

Maturity 126-127 

Commodity paper, eligibility of 117 

Notes, promissory, not eligible for 116-117 

Place of payment of trade acceptance 78 

Presentment of bills for acceptance 76 

Purchase of bank acceptances by member banks 24, 25, 44-46 

See also Acceptances, bank, Investment in 
Purchase of bank acceptances by reserve banks 118-122 

See also Open market transactions, Bank acceptances 
Purchase of bank's own acceptance 24, 25, 45-46 

Rediscount of: 

Agricultural paper 90-95 

Amount rediscountable by a Federal reserve bank 94-95 

Cattle dealers' notes 90 

Cattle for breeding, grazing, or fattening 93 

Cattle mortgages 92 

Chattel mortgages . . . 92 

Conditions of eligibility 91 

Dairy cattle, notes for 92 

Dealers, notes of 90 

Definition of agricultural paper 90-91 

Discount may be by either maker or indorser 93 

Eligible agricultural paper 91-94 

Farm tractors, notes for 93 

Farmers' notes 93 

Fertilizer, notes for 92 

Livestock paper 90 

Packing company, note of 91 

Statutory provisions governing agricultural paper 49, 91 

Bank acceptances 99-106 

Acceptance corporation, acceptances of 103 

Bills payable outside United States 104 

Chattel mortgages not eligible security 104 

Definition of bank acceptance 99-100 

Differential rate for member bank acceptances 103 

Drafts not payable at reserve banks 102 






PAGES 

Rediscount of — continued 

Bank acceptances — continued 

Eligible acceptors 99 

Eligible bank acceptances 100-103 

Evidence of eligibility 104-105 

Indorsement. 102, 106 

Ineligible bank acceptances 104 

Maturity 105 

Negotiability, conditions of 99-100 

Payment at Federal reserve bank 102 

Renewals, rediscount of 105 

Warehouse receipts of independent warehouses 103 

Commodity paper 96-98 

Conditions of eligibility 97 

Defined 96-97 

Direct discount for firms not authorized 98 

Eligible commodity paper 97-98 

Special rate, suspension of 98 

Staples defined 96 

Drafts and trade acceptances 76-89 

Acceptance by drawee 78 

Actually existing value, what constitutes 87-89 

Advertising space, acceptances based on 82 

Amount rediscountable for one bank 87-89 

Definitions 76-79 

Demand drafts ineligible 86 

Eligible drafts and trade acceptances 79-83 

Evidence of eligibility 84-85 

Extension of time 76, 86 

Foreign shipments, acceptances based on 79, 83 

Future purchases, acceptances based on 84 

Indorsement of member banks / 73, 89 

Ineligible drafts and trade acceptances 83-84 

Maturity 85-86 

Negotiability of drafts and trade acceptances 77-78 

Open accounts, acceptances used in liquidation of 81 

Qualified acceptances 88 

Rediscount for non-member banks 73-75, 89 

Retail transactions, trade acceptances based on 80 

Stamp "trade acceptance" has no value 85 

Notes, promissory 56-75 

Agricultural paper 56 

Amount rediscountable for one member bank 68-73 

Collateral notes 59-60, 64 

Commercial paper 56, 57 

Commodity paper 56 

Definition 56 

Demand:notes ineligible 67 

Eligible classes of notes 56-61 

Evidence of eligibility and requirement of statements 65-66 

Farmers' notes 58 

Fixed investments, notes for, not eligible 62 

Indorsement of member banks 73 

Ineligible classes of notes 62-64 

Liberty bonds, notes to replace funds for purchase of 63 

Maturity 66-68 



Rediscount of — continued pages 

Notes, promissory — continued 
Non-membeijbanks : 

Paper acquired from or indorsed by 01, 74 

Rediscount for 73-75 

Note of acceptance house or broker 63 

Notes based on production and distribution of goods 58 

Open accounts, assignment of 58 

Rediscounted paper not limited by U. S. Revised Statutes, section 5202 72 

Renewalnotes 58, 62 

Secured notes 59-61 

State member banks, rediscounts by 69, 72 

Statements, requirement and interpretation of 65-66 

U. S. obligations, notes based on or secured by 56-57, 60-61 

War Finance Corporation bonds, notes secured by 57, 60-61 

Trade acceptances, see Drafts and Trade acceptances 

Rediscounts with Federal reserve banks 49-106 

General regulations governing 53-55 

General statutory provisions 49-52 

Reissuance of acceptances 46 

Release of shipping documents and warehouse receipts 35 

Renewal of bank acceptances 22 

Renewal of member banks' notes for advances Ill 

Retail transactions as basis for trade acceptances 80 

Security, actual, what constitutes 24 

Security eligible for acceptances 38-41 

Single name paper ineligible for purchase in open market 116-117 

Staples defined 96 

State member banks, rediscounts for 69, 72 

Statements, requirement of 65-66, 121, 126 

Substitution of warehouse receipts 42 

Sunday or legal holiday, notes due on Ill 

Syndicate acceptance credits 14-15 

See also Acceptances, bank, Syndicate acceptance credits 

Trade acceptances .76-89, 123-127 

See also Acceptances, trade 

Transactions, acceptances must be based on actual 34 

Trust receipts as actual security 24 

U. S. Government, sales to, not basis for commodity paper 97 

U. S. obligations eligible collateral for member banks' notes 109-110 

U. S. obligations, rediscount of paper secured by 56, 60-61 

U. S. Revised Statutes, section 5200 (ten per cent limit on loans) 24-25, 43-46, 71 

U. S. Revised Statutes, section 5202 (limit on liabilities of bank) 27, 32, 37, 72-73 

Use of bank acceptances 9 

Warehouse receipts: 

Bank acceptances secured by 38-42 

See also Acceptances, bank, Secured by warehouse receipts 

Release of 35 

Substitution of 42 

War Finance Corporation bonds: 

Advances on member banks' notes secured by 109 

Rediscount of paper secured by 57, 60-61, 80 

War savings stamps, paper secured by, ineligible for rediscount 63 



National Bank of Commerce 
in New York 

ORGANIZED 1839 



President 
James S- Alexander 
Vice - Preside n ts 
R. G. Hutchins, Jr. John E. Rovensky 

Herbert P. Howell Faris R. Russell 

J. Howard Ardrey Guy Emerson 

Stevenson E. Ward Louis A. Keidel 

Cashier 
Richard W. Saunders 
Assistant Cashiers 
A. J. Oxenham Everett E. Risley 

Waiiam M. St. John H. P. Barrand 

A. F. Maxwell H. W. Schrader 

John J. Keenan R. E. Stack 

Gaston L. Ghegan L. P. Christenson 

A. F. Broderick E. A. Schroeder 

R. H. Passmore 

Statement of Condition 

November 1, 1918 



RESOURCES 

Loans and Discounts $307,609,266.34 

Overdrafts, secured and unsecured ----- 34,717.82 

U. S. Certificates of Indebtedness and Liberty Bonds - 96,560,090.37 

Other Bonds and Securities 10,034,212.13 

Stock of Federal Reserve Bank ----- 1,200,000.00 

U. S. and Other Bonds Borrowed - - - - - 24,689,450.00 

Bonds Loaned - - - 50,000.00 

Banking House - - - 2,000,000.00 

Due from Banks and Bankers 5,041,141.05 

Checks and other cash items ------ 3,262,846.30 

Exchanges for Clearing House ----- 49,315,517.36 

Cash in Vault and Net Amount Due from Fed. Res. Bank 46,487,833.87 

Interest Accrued - ------ - 1,464,253.05 

Customers' Obligations a/c Bank's Contingent Liability 1,440,000.00 
Customers' Liability under Letters of Credit and Accept ances 42,210,499.09 

$591,399,827.38 

LIABILITIES 

Capital Stock paid in $25,000,000.00 

Surplus Fund - - 15,000,000.00 

Undivided Profits, less expenses and taxes paid - - 9,376,660.45 

Reserved for Taxes, etc. 3,096,833.25 

Dividends unpaid - -- 17,525.00 

Letters of Credit 10,098,242.26 

Acceptances executed for Customers - - - - 32,591,498.60 

Deposits 379,835,997.64 

U. S- and Other Bonds Borrowed 24,689,450.00 

Unearned Discount 1,726,110.99 

Bills Payable with the Federal Reserve Bank - - 88,000,000.00 
Liabilities other than those above stated - - - 1,967,509.19 

$591,399,827.38 



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